Guinea

Lord Chidgey: asked Her Majesty's Government:
	Whether they have plans to classify the Democratic Republic of Guinea, Conakry, as a "fragile state" in the context of their strategy for aid disbursement.

Baroness Amos: My Lords, the Government do not have their own classification system for fragile states. The World Bank has produced a list of 46 countries that have fallen at least once into a difficult country environment in recent years, a measure that is used by the Department for International Development as a working proxy for fragile statehood. Guinea is included on that list.

Lord Chidgey: My Lords, I thank the noble Baroness for that reply. With reports of food riots spreading throughout Guinea and armed conflict taking place between rival groups that had wrongly heard that the president had died—in fact, President Conté's term of office is now likely to end in a military takeover—is that not a real sign of increasing instability in the region, which threatens the peacemaking efforts of the United Kingdom in neighbouring Sierra Leone and Liberia? Is there not now an urgent and critical need to provide substantial help to civic society in Guinea to prevent that country slipping down the road to military rule?

Baroness Amos: My Lords, the noble Lord is right that Guinea is a fragile and autocratic state. It is very important to peace and stability in the Mano river region, which includes Sierra Leone and Liberia, as the noble Lord said. We have seen the democratic elections and the election of President Johnson-Sirleaf in Liberia and hope that that will assist with stability. Of course, Côte d'Ivoire in the Mano river basin wider region is going through a difficult time. The noble Lord is right to say that support to civil society in Guinea remains very important. We are also working with our partners to ensure that there is a peaceful transition through democratic processes in Guinea.

Baroness Rawlings: My Lords, will the noble Baroness please update the House on how many Liberian refugees have voluntarily returned out of some 3,000 who have been living in Conakry since the start of the civil war in 1989, particularly in light of the famine affecting the country? What steps have Her Majesty's Government taken to promote the UNHCR information campaign on the issue in Guinea and other asylum countries, such as Sierra Leone, Côte d'Ivoire and Ghana, which she mentioned?

Baroness Amos: My Lords, I did not hear the second part of the noble Baroness's question.

Baroness Rawlings: My Lords, what steps have Her Majesty's Government taken to promote the UNHCR information campaign on the issue in Guinea and other asylum countries, such as Sierra Leone, Côte d'Ivoire and Ghana?

Baroness Amos: My Lords, I have the number of Liberian refugees in Guinea, but I do not have the number of Guinean refugees elsewhere in the region. There are 55,000 refugees from Liberia in Guinea who, we hope, will return by the end of this year or early next year because of the elections in Liberia and the election of President Johnson-Sirleaf. I shall look up the figures for Guinean refugees elsewhere.
	I was not aware that there was a UNHCR information campaign. I am aware of the work that the UN has been doing more broadly in establishing a code of conduct for UN workers in refugee camps. We have supported that campaign and the zero-tolerance regime being promoted by the United Nations.

Baroness Northover: My Lords, was the noble Baroness as concerned as I was to read the Save the Children Fund report on the exploitation of children there by UN peacekeepers and others? If additional assistance is to go to Guinea and this region generally, as seems to be the case, what safeguards will DfID put in place to ensure that the agents of such assistance do not then use their position for the sexual exploitation of children?

Baroness Amos: My Lords, I was concerned about the report, particularly as there was a similar report last year about the Democratic Republic of Congo, which the United Nations responded to extremely robustly, making it clear that it had a zero-tolerance policy. Of course, we take the allegations very seriously.
	We regularly raise the issue of UN standards of conduct with UN officials. We provide support for the measures that they are taking; in the wider region, for example, we have provided £2.35 million to finance the removal of unsuitable police officers in Liberia. We take the issue very seriously and will support the UN in its efforts. Through our monitoring, we will ensure that our money is not misspent.

Lord Hylton: My Lords, has the issue of misbehaviour by peacekeepers not come up on several occasions already—in Bosnia and Kosovo, for example? Should Her Majesty's Government not take a strong stand with the United Nations and other states that are contributing peacekeeping forces?

Baroness Amos: My Lords, I can confirm that we take a strong stand on the issue. In addition, I recall that, last year, the deputy Secretary-General of the United Nations travelled to a number of UN peacekeeping missions to ensure that there was understanding of the UN's zero-tolerance policy on the matter.

Lord Chidgey: My Lords, can the Minister confirm that DfID has received a proposal from a number of NGOs to provide real support for civic society in Guinea? When are we likely to hear a response from that department?

Baroness Amos: My Lords, I will write to the noble Lord on that. I am aware of proposals coming in but not of the response to them.

Common Agricultural Policy: Single Farm Payments

Lord Renton of Mount Harry: asked Her Majesty's Government:
	When they expect to have made all overdue single farm payments.

Lord Rooker: My Lords, before I answer the noble Lord's Question, I pay tribute to my noble friend Lord Bach for his work at Defra in the past year.

Noble Lords: Hear, hear.

Lord Rooker: My Lords, as my right honourable friend the Secretary of State said yesterday in the other place, some 85 per cent of the £1.5 billion due to farmers under the 2005 single payment scheme will be disbursed by the end of the week. That is not cheques in the post; we are checking today, and the money is arriving in the banks. The payment agency's top priority—and, indeed, mine—will be ensuring that applicants who have not yet received a payment receive one as soon as possible.

Lord Renton of Mount Harry: My Lords, I remind noble Lords of my interest as chairman of the South Downs Joint Committee. I congratulate the Minister on his new appointment. As he is a well known toughie, I am not surprised to find him at Defra, considering that four of the other five Ministers have gone. The previous Secretary of State must be lucky to find herself at the Foreign Office.
	That said, I am delighted to hear the Minister's announcement today. How does he propose to handle this in the future? Let us agree that the single farm payments have been a horrendous shambles. How can the system now be made simpler for the farmers? Is the noble Lord aware that the applications for 2006 must be in in five days' time? Many are unsure of their entitlements. The Minister must ensure that the shambles of the past 12 months does not happen again.

Lord Rooker: My Lords, I thank the noble Lord for his welcome. We deeply regret what has happened and the massive distress that has been caused to farmers. Eighty-five per cent of the money will be disbursed, but that is not 85 per cent of the applicants. There are still applicants who have had no money. We have to move quickly to make sure that they receive it. We also have to learn the lessons of what has happened, which has been unique to England. It has not been a difficulty in Scotland or Wales or in Northern Ireland, although I claim no credit for that because the work was well under way before I arrived. However, there are lessons to be learnt on the design of forms and the way that the IT works. There will be problems, and it is not a given that next year will be without difficulties. However, we will move heaven and earth to make sure that we limit them as much as possible.
	We will extend the closing date for 2006 forms to 31 May without penalties, but it is in the interests of farmers to get those forms in as soon as possible.

Lord Carter: My Lords, what is the position of farmers who are due the hill farm allowance?

Lord Rooker: My Lords, farmers in receipt of the hill farm allowance are probably farming on some of the most difficult areas and are not the wealthiest of farmers. Their payments have been held up because of the way the rules have worked: they cannot get the hill farm allowance until the single farm payment has been dealt with. That has been a major problem. I assure my noble friend and the House that, as of my right honourable friend's Statement yesterday, we have reprioritised so that those who will be in receipt of the hill farm allowance have a higher priority than hitherto. I will be at the headquarters of the payments agency before the end of the week to see that priority being materialised.

Viscount Bledisloe: My Lords, does the promotion of the previous Secretary of State, who is entirely responsible for this lamentable mess, demonstrate the Government's belief that it does not matter how many bloomers you make provided that you are dealing only with foreigners and foreign affairs?

Lord Rooker: My Lords, I deeply resent that. My right honourable friend the Foreign Secretary has had an outstanding record as a Minister for longer than most people have been in the House of Commons. She served first in the government of Harold Wilson, and she has served with distinction in every post that she has had.

Lord Livsey of Talgarth: My Lords, will the Minister accept my congratulations on receiving the ministerial post? He was a MAFF Minister, and I have confidence that he will try to sort things out. How much interest is due on single farm payments and when will it be paid? The payments were due to be paid by 31 March, and many farmers have now waited more than six weeks for them. Given the record of stand-apart agencies—for example, the CSA—will he review whether the RPA is up to its job?

Lord Rooker: My Lords, on the latter part of the noble Lord's question, a team of Ministers is naturally bound to review matters. However, we do not want to disturb next year's payments. It is important that we learn the lessons of this year and do not have massive dislocation as a result of too many changes at the same time. We must be careful about that. Naturally, as we get into our briefs, we will be reviewing what has happened.
	The issue of interest is a seductive one. Eighty-five per cent of the £1.5 billion should be in bank accounts by the end of this week. I understand that, under the rules, interest will not arise until 30 June. We will then consider the situation.

The Lord Bishop of Exeter: My Lords, is the Minister aware of the impact of the delays in making the payments not merely on agriculture but on the wider rural economy? Do the Government recognise that a medium livestock firm provides employment and income for around 60 rural businesses and that a dairy firm typically depends on 27 suppliers? To what extent do the Government recognise that those firms are also incurring debt and facing the prospect of losing their livelihood? What plans do they have to address the latest distress in the rural economy?

Lord Rooker: My Lords, every issue that arises affects those down the chain in the rural economy. That issue crossed my desk when I was previously in MAFF. There is real difficulty when the recipient of what is, in effect, public money paid through the common agricultural policy does not get it and so cannot spend it in the local economy. That is a real problem, and there is no easy answer. However, I am more than happy to discuss it with those concerned in rural affairs—most Members of this House, including myself—and the farming industry.

The Earl of Erroll: My Lords, would the Minister consider back-dating entry-level scheme payments? Farmers have not been able to enter because the maps were not ready. They have expended money on seeds and cultivation to put in place the environmental measures but have been unable to receive payment for them for the past year.

Lord Rooker: My Lords, I regret that I do not have a brief on that. I suspect that the answer will be no. We are working to rigid rules not invented in this country but laid down by the European Commission. That is part of the situation. We have to work within those, although we are outside them in this case because we have delayed the payment. Nevertheless, I suspect that back-dating may have been discussed. I am happy to take it on board and will happily write to the noble Earl if I can give him an answer of substance.

Baroness Byford: My Lords, I remind the House of my family's farming interest. I welcome the noble Lord, Lord Rooker, to this brief. He brings with him a reputation for sharp questioning, and he will be very welcome at Defra at this moment.
	I want to ask him about the person in charge. It was Mark Addison temporarily, but he has just gone. I understand that Mr Cooper has just joined the agency, but he is only temporary and will go. Mr Cooper brings with him great expertise in the IT system. Does that imply that the IT system was unable to cope with the payments?

Lord Rooker: My Lords, I am grateful for the opening remarks of the noble Baroness, and I look forward to working with her on these important issues.
	On the latter point, frankly, I am in no position to answer. I have just flown in from Northern Ireland, and I am going back there because this happens to be its biggest agricultural food week with the Balmoral show. I have promised to be there tomorrow, and everyone has agreed that I should be. I have been in Defra for half an hour, and I will be there for another hour. I have worked more than half an hour today, but I am in no position to answer. Mr Addison obviously was a Defra official. It was never planned that he would be long term on the operation. Together with the people in the Rural Payments Agency—I pay tribute to them—he has obviously masterminded a massive turnaround in a short time in the past few weeks.
	As for the future, obviously there is a pro tem appointment, as the noble Baroness says. The desire now is to get the system clear so that we have confidence in it. We can then look at the situation in the Rural Payments Agency before we make permanent long-term appointments.

Planning: Brownfield Sites

Baroness Fookes: asked Her Majesty's Government:
	Whether they will redesignate the term "brownfield site" so that it excludes gardens.

Baroness Andrews: My Lords, draft Planning Policy Statement 3 Housing (PPS3), published for consultation in December 2005, does not propose a change in the definition of brownfield land. Residential gardens have been included as brownfield land since 1985. However, as draft PPS3 emphasises, that does not necessarily mean that they are suitable for development.

Baroness Fookes: My Lords, I find that Answer disappointing. Is the noble Baroness aware that many local authorities are afraid to refuse permission for the development of gardens because they fear, with considerable justification, that it will be overturned on appeal? Will she at least give them some crumb of comfort by suggesting to them that, where they feel that development would lead to the destruction of the character of the neighbourhood or serious parking problems, she will encourage them to say no?

Baroness Andrews: My Lords, as I said, the policy goes back to 1985. It is interesting that, in 1992, the equivalent guidance stressed:
	"Homes with large back gardens are a common feature in many urban, suburban and village areas. Sometimes it may be acceptable to develop back gardens for new housing which is in keeping with the character and quality of the local environment".
	The only change that we have made in the draft guidance is to place a greater emphasis on the need for development to fit into the wider vision for residential development. That applies now to small-scale developments. I hope that that helps meet the point. Local authorities have as many powers as they have ever had to turn down inappropriate development, and of course many of them do.

Baroness Scott of Needham Market: My Lords, does the noble Baroness accept that the fact that the Government have set rigid targets for brownfield development has meant that councils have already developed the easy sites and are therefore feeling under pressure to allow planning permissions on gardens and playing fields? Does the noble Baroness accept that it is now time to allow local authorities much more flexibility in determining their own planning policies rather than to set rigid targets for them?

Baroness Andrews: My Lords, I am pleased to report that, because we have prioritised brownfield sites precisely to protect the green belt and the openness of our countryside, we are exceeding our target, which was 60 per cent. We are now building on 72 per cent brownfield and show signs of going higher than that. When we look at where best to develop, we must keep that as our priority, and that is working.

Lord Skelmersdale: My Lords, I accept the Minister's description of gardens as not necessarily suitable for development, but, given the fact that they have for some time been designated as brownfield sites, is there not a planning presumption in favour of development? Is it not that that concerns my noble friend?

Baroness Andrews: No, my Lords; I do not think that there is a presumption of development at all. I think that every case is dealt with on its merits. Our emphasis is on retaining the character of the local area in development, especially now with the greater openness. Statements of community involvement, for example, will enable local people to have a greater say about what happens in their neighbourhood and ensure that the local authority shows that it has listened to them. That promotes a much more positive process for planning as a whole.

Baroness Byford: My Lords, what percentage of brownfield sites, which my noble friend mentioned with regard to gardens, would make up that total?

Baroness Andrews: My Lords, we do not keep figures for the amount of land that is, as it were, allocated to gardens in respect of the targets that the noble Baroness mentioned. I think that I am right to say that about 22 per cent of brownfield sites are previously developed and are residential, but I shall clarify that in writing if necessary.

Government: Ministerial Responsibilities

Baroness Seccombe: asked Her Majesty's Government:
	What are to be the official responsibilities of the First Secretary of State.

Lord Bassam of Brighton: My Lords, the Deputy Prime Minister will continue to provide invaluable support to the Prime Minister in all aspects of government policy, including chairing the Domestic Affairs Committee, which oversees the whole of domestic policy. As part of that role, the Deputy Prime Minister will chair a number of major Cabinet committees. He will be heavily involved in policy on energy and pensions. In recognition of his work delivering the Kyoto treaty, he will work with the Foreign Secretary and the Secretary of State for Environment, Food and Rural Affairs on developing the post-Kyoto environmental agenda.

Baroness Seccombe: My Lords, I thank the Minister for that reply. Exactly which Cabinet committees will the First Secretary of State chair, and how often have those committees met during the past 12 months? If he is unable to give that information today, will he please write to me and place a copy in the Library of the House?
	Does the Minister realise that it does not help the present Deputy Prime Minister to hit out at his predecessors? Mr Prescott has embarrassed many people in his party and elsewhere and cost many good Labour councillors their seat. Many of those people must be staggered that he remains in office while they do not.

Lord Bassam of Brighton: My Lords, the noble Baroness made a number of points there. I shall try to deal with those that are practically related as best I can. As I understand it, the Deputy Prime Minister will chair five Cabinet sub-committees, which are likely to include those that he chaired prior to the recent government reshuffle. One of the most important of those is the Domestic Affairs Committee. There are others, such as the Public Health Committee and the Local and Regional Government Committee. The Deputy Prime Minister also acts as a deputy chair to eight other sub-committees and sits on a further 11, so the Deputy Prime Minister will be very busy, as I am sure that his predecessors were.

Lord Foulkes of Cumnock: My Lords, is my noble friend aware that, when I was a Minister, I sat on committees chaired by John Prescott? I recall him doing that with great skill and adroitness, enabling issues to be dealt with throughout Whitehall, instead of by each individual department, clearing up some of the problems that we inherited from the party opposite. Will my noble friend also confirm that, even with his reduced role, John Prescott will still be doing more than Michael Heseltine, who was bought off by John Major and spent two years going round the country promoting the Tory party until 1997—and a fat lot of good it did them then?

Lord Bassam of Brighton: My Lords, I remember 1997 with great delight, as I am sure most of my colleagues do. It is true that Michael Heseltine presaged the Conservatives' largest defeat in recent electoral history. I have a feeling that our Deputy Prime Minister will help us to recover our strength in the country and help to lead us to a fourth victory.

Baroness Wilcox: My Lords, in the business and professional world, it is recognised that it is important to protect employees, especially women, from abuse and harassment. The protection often involves suspension and investigation. Are investigations under way in Whitehall into the affairs of the Deputy Prime Minister, or is there one law for Ministers and another law for the rest of us?

Lord Bassam of Brighton: My Lords, I will not be drawn into private matters, as I do not think it appropriate for us to discuss them. That is clearly where the noble Baroness's question is coming from, and I think one should recognise that.

Lord Maclennan of Rogart: My Lords, does the Minister remember that the Prime Minister used to speak of a modern constitution for a modern Britain? What is modern about appointing a senior Secretary of State to a position of power without responsibility?

Lord Bassam of Brighton: My Lords, I thought that I had given a pretty good description of the extensive range of the Deputy Prime Minister's interests. Our Prime Minister has great confidence in Mr Prescott to deliver on those and on his important role of ensuring effective policy co-ordination across Whitehall. I think that that is an important job.

Lord Clarke of Hampstead: My Lords, will my noble friend join me in recognising the tremendous effort and leadership shown by the Deputy Prime Minister in the creation and development of the Elevate programme and the regeneration of the urban areas in the north-west of this country? It is easy to throw out lines about people's lives outside politics, but does my noble friend agree that the policies that the Office of the Deputy Prime Minister has been pursuing have given renewed hope and optimism to long-neglected parts of the country such as Burnley, where people now have something to look forward to?

Lord Bassam of Brighton: My Lords, I entirely endorse what the noble Lord says. It is well known that Mr Prescott has paid great attention to the regions of our country; indeed, more than administrations run by the Conservatives have done. I pay particular tribute to him for his work in helping the recovery and regeneration of Burnley following the riots there.

Lord Tebbit: My Lords, does the Minister understand that my noble friend's question was not about a private matter; it was about the conduct of a man towards the female staff who were responsible to him? Shall I pause for a moment while the Chief Whip tells him what to say? If the Minister does not want to answer that question because it was too embarrassing, can he say whether the Permanent Secretary in Mr Prescott's department took up the matter of his conduct with either Mr Prescott or the civil servant in that department? That is not a private matter; it is a matter of public policy.

Lord Bassam of Brighton: My Lords, I think that our Government have a pretty good track record on openness and on being quite clear about ministerial responsibilities, codes of practice and all those sorts of things. Indeed, they have been better about those things than any of the administrations of which the noble Lord was a member. I am not going to hide behind those things because I do not believe that that is right or appropriate, and I am sorry that the noble Lord raised the issue in the way in which he did.

Baroness Scott of Needham Market: My Lords, does the Minister accept that local councillors who have had the Standards Board for England foisted on them by the Deputy Prime Minister are rather concerned that that body can suspend them from office for private conduct, whereas the man who brought the code into being can do what he likes and no one questions it?

Lord Bassam of Brighton: My Lords, I have already made it plain, and I have made it plain on other occasions, that Ministers must abide by the Ministerial Code. The Prime Minister is responsible for upholding that, and I am sure that he does.

Lord Crickhowell: My Lords, would I be right in thinking that the Deputy Prime Minister chairs the Legislation Committee and is therefore responsible for bringing to Parliament Bills that are always clear, in precisely expressed English and easily understood?

Lord Bassam of Brighton: My Lords, the Deputy Prime Minister does not chair that committee.

Lord Forsyth of Drumlean: My Lords, is the problem not the Deputy Prime Minister's responsibilities and the loss of them but his authority? Has he not lost all authority?

Lord Bassam of Brighton: My Lords, I do not think that the Deputy Prime Minister has lost authority. I am sure that his colleagues in government and his colleagues on our Benches believe that he has an important job to do. Knowing John Prescott as well as I do, I am sure that he will carry out that job to the best of his abilities.

Lord Swinfen: My Lords, what official use will the Deputy Prime Minister be making of his two official residences?

Lord Bassam of Brighton: My Lords, the same as all previous occupants of those buildings. Such luminaries as the noble Lords, Lord Heseltine and Lord Baker, and the noble and learned Lord, Lord Howe of Aberavon, have enjoyed those premises. I am sure that John Prescott enjoys them in the same way.

Procedure of the House: Select Committee Report

Lord Brabazon of Tara: rose to move, That the fourth report from the Select Committee be agreed to (HL Paper 172).—(Lord Brabazon of Tara.)
	The report can be found at the following address: http://www.publications.parliament.uk/pa/ld200506/ldselect/ldprohse/172/17202.htm

Lord Brabazon of Tara: My Lords, I beg to move the Motion standing in my name on the Order Paper. This is the second of two reports from the Procedure Committee to implement the House's decision to elect a Speaker. However, unlike the previous report, this one deals with two matters not covered in the report of the Select Committee chaired by the noble and learned Lord, Lord Lloyd of Berwick.
	First, there is the question of interests. In a nutshell, we recommend that the Lord Speaker should have no other paid work. I hope that your Lordships will agree that this would be right, particularly in view of the recent decision about the salary. Secondly, on the process of election, we recommend that candidates should be able to submit a short election address. The report also covers processions and dress.
	If the House agrees this report, the Clerk of the Parliaments will issue a notice this week setting out the details of the election and a full job description for the post of Lord Speaker.
	Moved, That the fourth report from the Select Committee be agreed to (HL Paper 172).—(The Chairman of Committees.)

Lord Steel of Aikwood: My Lords, I do not want to detain the House on what might be thought to be a trivial matter in the report, but I suspect that not many of us have read it. I confess that I read it myself only—here I declare an interest, although a declining one—as a putative candidate for the post. Astonishingly, under the item headed "The Lord Speaker's Dress", it is recommended that, in the Chamber and on duty outside,
	"he or she should wear court dress".
	We have managed to get the Lord Chancellor out of tights and buckled shoes and into trousers. I cannot see why, when we are disposing of the wig, we insist that our Lord Speaker should go back into 19th-century court dress. In a previous speech, I said that we were looking for a Speaker for, rather than of, the House of Lords. The idea that we should send him or her into the outer world to talk about the work of the House of Lords in tights and buckled shoes is ridiculous.
	More than 30 years ago, my father was Moderator of the General Assembly of the Church of Scotland. He was one of the last who had to wear court dress. He managed to persuade many of his successors to abandon it. I do not think that any Moderator has been seen in that sort of outfit for the past 20 years. I find this extraordinary. I do not want to make a meal of it, but it would be very helpful if the Chairman would simply indicate that it is a recommendation and that the matter would be discussed with whomever we elect. I also think that the language is sexist: I am not aware of female court dress.

Lord Brabazon of Tara: My Lords, I am grateful to the noble Lord for his intervention. In fact, there is female court dress. My noble friend Lady Boothroyd wore it, I believe, with distinction.

Baroness Boothroyd: With great distinction, my Lords.

Lord Brabazon of Tara: My Lords, my noble friend corrects me. She wore it with "great distinction" in another place. I do not think that it is a big deal, but it is important that our new Speaker should wear something distinguished in this House beneath the gown which has been agreed. There are certain occasions—for example, receptions in the Robing Room, of which there have been a number recently—when it is important that our Speaker should perhaps be recognisable from the rest of us and on something of a par with the Speaker of the House of Commons. But I am told that there will be no tights.

Earl Ferrers: My Lords, does the Chairman of Committees realise that the noble Lord, Lord Steel, did not speak for everyone? Many people have seen this whole process of electing a Speaker of your Lordships' House to be a miserable saga. They are, nevertheless, gratified that the Speaker will be properly dressed.

Lord Brabazon of Tara: My Lords, I commend to your Lordships the fact that the agenda for the Procedure Committee, which produced this report, included photographs of the various forms of dress that we are recommending. They are available in the Library, so, if anybody wants to go and look at them, I suggest that they do so.

Lord Tomlinson: Is the noble Lord aware that a number of people have been discussing the Motion on which we voted last week and have only just begun to realise the great length of time there is between the election and the declaration of the result? Is he further aware that if those standards of election were applied in some of the newly emerging democracies in eastern Europe, they would be rejected as being unsound and unfair by bodies such as the Council of Europe that monitor those elections? That is because those bodies think that such a delay between the election and the declaration without there being proper scrutiny of the results is improper.

Lord Brabazon of Tara: My Lords, I am not going to comment on what happens in eastern Europe or other emerging democracies. The House has already agreed the report that contained this timetable. This House is perhaps an emerging democracy but I would point out—and I hope your Lordships will accept—that we are using the services of the Electoral Reform Society for this procedure. That society has a worldwide reputation for running this kind of thing. As far as scrutiny is concerned, we will take its advice on what should happen.

Lord Geddes: My Lords, paragraph 2 of the report runs into the dangerous territory of making a list. Your Lordships have frequently commented on this matter regarding Bills, stating that the minute one produces a list one looks to see what is not included in it. In his opening comments, the Lord Chairman said that the Speaker should avoid any remuneration from outside—I am paraphrasing his words. If that is so, presumably remunerated trusteeships ought to be included, in that they are neither remunerated directorships nor remunerated employment. That seems to be an omission.

Lord Brabazon of Tara: My Lords, I had hoped that we would not get into the nitty-gritty of this list because, as the noble Lord, Lord Geddes, says, if one does so one can get into problems. This list is reproduced from the existing code; that is the point about it. I draw your Lordships' attention to paragraph 4, which states that the registrar will be able to advise, and the registrar's word is taken now as good.

On Question, Motion agreed to.

Dynamic Demand Appliances Bill [HL]

Read a third time, and passed, and sent to the Commons.

Company Law Reform Bill [HL]

Lord Sainsbury of Turville: My Lords, I beg to move that the Bill be now further considered on Report.

Moved accordingly, and, on Question, Motion agreed to.
	Clause 341 [Political parties, organisations etc to which this Part applies]:

Lord McKenzie of Luton: moved Amendment No. 170:
	Page 150, line 22, leave out subsection (4).

Lord McKenzie of Luton: My Lords, in moving Amendment No. 170, I shall also speak to Amendments Nos. 171 to 173, 175 to 179, and 183 to 187. These amendments are concerned with Part 14 of the Bill—political donations. Although they address a number of different issues, I will speak to them together for efficiency because, apart from one minor correction, they address concerns that have been raised by noble Lords in Committee.
	The first couple of amendments, those to Clauses 341 and 343, simply correct a drafting inconsistency between the definitions of political expenditure that appear in these clauses. I am grateful to the noble Lord, Lord Razzall, for highlighting this inconsistency in Committee.
	Clause 342 refers to the definition of "political donation" set out in the Political Parties, Elections and Referendums Act 2000. Changes to this definition have recently been agreed by way of amendments to the Electoral Administration Bill in this House relating to loans made to political parties. The amendment to Clause 342 ensures that the scope of this provision is not altered by the changes to the Political Parties, Elections and Referendums Act 2000 made by the Electoral Administration Bill. In other words, Part 14 of this Bill will continue to apply only to political donations, which are defined as including loans at a non-commercial rate. It remains the case that Part 14 does not apply to loans at a commercial rate.
	The next set of amendments in this group concerns Clause 345. The amendments respond to an issue raised by the noble Lords, Lord Hodgson and Lord Razzall, in Committee regarding whether it should be necessary for a holding company to name each of its subsidiaries when passing a resolution that gives approval for a political donation. I accept that the requirements of this clause should not be overly restrictive when a holding company passes a resolution in relation to its subsidiaries. Accordingly, Amendments Nos. 175 to 179 make it clear that a holding company does not need to refer to each of its subsidiaries in the circumstances specified.
	The amendments to Clause 348 are concerned with the liability of directors of a holding company in the case of unauthorised political expenditure or an unauthorised political donation by a subsidiary. I hope that it will be helpful to noble Lords, and for the record, if I describe the mechanics of the amendment in a little detail, as I know that this was a point of particular concern during the discussions in Committee, and we believe that these amendments go a long way towards addressing it.
	First, Amendments Nos. 183 and 184 adjust the terminology, replacing "responsible directors" with "directors in default". This makes it clearer, for the avoidance of doubt, that a director may apply for relief under Clause 769, which refers to proceedings for default. Secondly, Amendment No. 185 addresses the particular concern that the directors of a holding company could be liable for a political donation made by a subsidiary over which they have no control or of which they have no knowledge.
	It is worth emphasising at this point that the liability of such a director of a holding company is already limited by the definition of "subsidiary" in Section 736 of the 1985 Act. Essentially, that section defines a subsidiary as being a company controlled by a holding company by virtue of the fact that the holding company controls a majority of its voting rights or has the right to appoint or remove a majority of its board of directors. Therefore, in many cases the directors of a holding company will control the voting rights that the subsidiary needs to pass a resolution approving a political donation.
	We recognise that there may be cases where directors of a holding company are not aware of a political donation made by a subsidiary or are powerless to prevent it. The amendment provides that the directors of a holding company will be liable only if they have failed to take all reasonable steps to prevent the donation from being made by the subsidiary. Accordingly, the directors of the holding company will not be liable for an unauthorised political donation by a subsidiary if, having taken all reasonable steps, they are unaware of the donation or are powerless to prevent it. However, if, for example, the directors of a holding company use the controlling voting rights that they have in a subsidiary to pass a resolution authorising the subsidiary to make a political donation without an authorising resolution from the members of the holding company, the directors of the holding company will be liable. I note that Amendment No. 186, tabled by the noble Lords, Lord Sharman and Lord Razzall, addresses the same point. In the light of my explanation, I hope that they will not move it.
	I turn finally in this group to Amendment No. 187, to Clause 356. This is a minor correction to the drafting. I beg to move.

Lord Sharman: My Lords, as the noble Lord, Lord McKenzie, has said, I have added my name to Amendment No. 186 in this group. I begin by acknowledging the very significant steps taken by the Government to meet our concerns in this difficult area. As the noble Lord, Lord McKenzie, said, Amendments Nos. 186 and 185 address the same issue. There is, however, a subtle difference between the two. I will not move Amendment No. 186, but I ask the Government and the Bill team to take on board the issue of knowledge. Government Amendment No. 185 does not address whether the directors had knowledge of the illegal donation, but Amendment No. 186 takes this into account by referring to them having the knowledge and whether they did anything about it. I shall not press the amendment at this stage, but I would like the Government to take that on board.

Lord McKenzie of Luton: My Lords, before the noble Lord sits down, we did not favour that approach because you could have situations where the directors might deliberately choose not to seek such knowledge or to avert their gaze to allow the donation to happen. That is why we think our formulation is the better one.

Lord Sharman: My Lords, I am grateful for that explanation. I shall reflect on it before deciding whether to come back on the issue.

Lord Hodgson of Astley Abbotts: My Lords, I thank the Minister for the two groups of amendments led by Amendment No. 175 and Amendment No. 183. I understand the point made by the noble Lord, Lord Sharman, but the two groups of amendments go a long way towards meeting the concerns that we expressed in Committee.

On Question, amendment agreed to.
	Clause 342 [Meaning of "political donation"]:

Lord McKenzie of Luton: moved Amendment No. 171:
	Page 151, line 9, at end insert—
	"( ) For the purposes of this section, sections 50 and 53 of the Political Parties, Elections and Referendums Act 2000 (c.41) (definition of "donation" and value of donations) shall be treated as if the amendments to those sections made by the Electoral Administration Act 2006 (which remove from the definition of "donation" loans made otherwise than on commercial terms) had not been made."
	On Question, amendment agreed to.
	Clause 343 [Meaning of "political expenditure"]:

Lord McKenzie of Luton: moved Amendments Nos. 172 and 173:
	Page 151, line 19, after "party" insert "or other political organisation,"
	Page 151, line 22, after "party" insert "or other political organisation,"
	On Question, amendments agreed to.
	Clause 344 [Authorisation required for donations or expenditure]:

Lord Hodgson of Astley Abbotts: moved Amendment No. 174:
	Page 151, line 36, at end insert—
	"(a) by a resolution of the board of directors of the company; or"

Lord Hodgson of Astley Abbotts: My Lords, in moving Amendment No. 174, I shall speak also to Amendments Nos. 180 and 181. The amendments are to Clauses 344, 345 and 346, which concern the authorisation required for donations or expenditure under Part 14 in connection with political activities, and relate to the procedure which needs to be followed by companies where they wish to make such donations or incur such expenditure.
	The Bill currently provides that political donations or expenditure must be authorised by resolution of all the members of the company. The amendments we have tabled would enable authorisation by a resolution of the board of directors. This would save the time and expense required to seek the permission of all the members.
	Much of our debate yesterday centred on the responsibilities and liabilities of directors, a matter addressed by my noble friend Lord Freeman. The new codification of duties, which the Government achieved after a Division yesterday, imposes new statutory responsibilities on directors and the new statutory derivative claim which expand the grounds upon which members can claim against directors on behalf of the company. All these new obligations appear to be designed to ensure that directors follow the correct procedures and take into consideration the correct influences when making decisions for the company. They will also allow greater scrutiny of these processes and greater activism to chase up errant boards and errant directors.
	So, bearing that in mind, we are unconvinced by the comments of the noble Lord, Lord McKenzie, in Grand Committee that such political donations,
	"might be seen to reflect the director's personal viewpoint rather than the interests of the company".
	He went on to state:
	"That is the nuisance that we are seeking to avoid, and the requirement for member authorisation is needed to achieve that".
	If that really is the case, then what purposes do the newly codified directors' duties achieve? It is strange that the Government should have so little confidence already in the effectiveness of the newly codified duties that they have fought so hard to introduce to this Bill. Therefore, if the Government have faith in their new reforms to directors' duties, we see no reason why it should not be appropriate for boards of directors to authorise political donations and expenditure.
	The noble Lord, Lord McKenzie, also spoke about what he perceives as the parity between trade unions and companies when it comes to donations. He said:
	"It is also right that trade unions have to go to their members to be able to set up a political front".—[Official Report, 1/3/06; GC 147.]
	I do not think he meant "front", but that is what is recorded in Hansard—I think he meant "fund". This is somewhat misleading; as I understand it, trade unions merely ballot their members over the setting up of a political fund once, and then every 10 years subsequently to maintain the fund. A company, however, will be required to do so every time it makes a donation. To compare the two, and to say that all is balanced, strains the bounds of credibility.
	Our amendments seek to redress the balance a little. Companies would still be able to make donations or expenditure of a political nature where it is in the best interests of the company. In fact, under these amendments, it would probably have to be even more clearly in the interests of the company as the directors have a duty to so act while the members, acting in their personal capacity, have no such duty and may well be swayed by their own political inclinations, despite any benefit the company in which they are invested may obtain. Companies would be able to do so with a minimum of administrative effort and expense, unlike the proposed mechanism in the Bill. Shareholders would retain their ability to be in overall control through the various checks and balances that already regulate directors' conduct and those that the Bill introduces or amends. I beg to move.

Lord McKenzie of Luton: My Lords, I fear that I shall disappoint the noble Lord by singing a song he has heard before. We agree, of course, that directors should comply with their general duties to the company in everything that they do as a director. In a perfect world, that would be sufficient. However, it would be unrealistic to overlook the fact that when it comes to political donations, the possibility of a conflict of interests is particularly acute and a requirement for shareholder consent is appropriate.
	Amendments Nos. 174 and 181 would remove the requirement for prior shareholder authorisation and, in doing so, would neuter the provisions entirely. In this context, we do not believe that Amendment No. 180, which draws an explicit link between the ability of a board to authorise a political donation and its general duties, provides anything more than window dressing.
	I do not think that there is very much to be gained by setting out in detail our reasoning for opposing the amendments as it simply boils down to a matter of principle. But it is worth noting that the requirement for member authorisation is hardly unique to this part of the Bill. For example, Chapter 4 of Part 10 details a number of transactions that require the approval of members.
	We believe the approach that we have adopted in this part provides business with sufficient flexibility to manage legitimate activities with the minimum of process overhead. To relax the restrictions in the manner proposed by the noble Lord would be a radical change that would undermine the entire raison d'être of this part and reverse the existing law. I need hardly remind noble Lords that the current law is based on the recommendations of the Committee on Standards in Public Life.
	I hope that the noble Lord, Lord Hodgson, will recognise that on this point of principle we have no flexibility, and does not feel it necessary to press the amendment.

Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister. As he said, the tune was, as I expected, slightly familiar. I notice that he fell back on the issue of conflicts of interest. That is a fair point but, if that were the case, it would be good if trade unions had to make a similar annual requirement to poll their members, ensuring that there was no conflict of interest on that side either. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 345 [Form of authorising resolution]:

Lord McKenzie of Luton: moved Amendments Nos. 175 to 179:
	Page 152, line 28, at end insert—
	"(1A) A resolution may be expressed to relate to all companies that are subsidiaries of the company passing the resolution—
	(a) at the time the resolution is passed, or
	(b) at any time during the period for which the resolution has effect,
	without identifying them individually."
	Page 152, line 29, leave out "For each company to which it relates"
	Page 152, line 33, at end insert—
	"( ) The resolution must specify a head or heads—
	(a) in the case of a resolution under subsection (1A), for all of the companies to which it relates taken together;
	(b) in the case of any other resolution, for each company to which it relates."
	Page 152, line 36, leave out from "For" to second "each"
	Page 152, line 39, at end insert—
	"( ) The resolution must specify such amounts—
	(a) in the case of a resolution under subsection (1A), for all of the companies to which it relates taken together;
	(b) in the case of any other resolution, for each company to which it relates."
	On Question, amendments agreed to.
	[Amendment No. 180 not moved.]
	Clause 346 [Majority required for authorising resolution]:
	[Amendment No. 181 not moved.]
	Clause 348 [Liability of directors in case of unauthorised donation or expenditure]:

Lord McKenzie of Luton: moved Amendments Nos. 183 to 185:
	Page 153, line 12, leave out "responsible directors" and insert "directors in default"
	Page 153, line 17, leave out "responsible directors" and insert "directors in default"
	Page 153, line 21, leave out paragraph (b) and insert—
	"(b) where—
	(i) that company was a subsidiary of a relevant holding company, and
	(ii) the directors of the relevant holding company failed to take all reasonable steps to prevent the donation being made or the expenditure being incurred,
	the directors of the relevant holding company."
	On Question, amendments agreed to.
	[Amendment No. 186 not moved.]
	Clause 356 [Donations not amounting to more than £5,000 in any twelve month period]:

Lord McKenzie of Luton: moved Amendment No. 187:
	Page 157, line 12, after "to" insert "a donation made by"
	On Question, amendment agreed to.
	Clause 378 [Exemption for company included in EEA group accounts of larger group]:

Lord McKenzie of Luton: moved Amendments Nos. 188 to 190:
	Page 168, line 25, after first "the" insert "allotted"
	Page 168, line 29, after "remaining" insert "allotted"
	Page 168, line 30, after "total" insert "allotted"
	On Question, amendments agreed to.
	Clause 379 [Exemption for company included in non-EEA group accounts of larger group]:

Lord McKenzie of Luton: moved Amendments Nos. 191 to 193:
	Page 170, line 7, after first "the" insert "allotted"
	Page 170, line 11, after "remaining" insert "allotted"
	Page 170, line 12, after "total" insert "allotted"
	On Question, amendments agreed to.
	Clause 393 [Duty to prepare directors' report]:

Lord Sainsbury of Turville: moved Amendment No. 194:
	Page 178, line 33, leave out subsection (2).

Lord Sainsbury of Turville: My Lords, in moving the amendment I shall speak also to the 61 other amendments which stand in my name in this group. I said during the debates on the business review and the operating and financial review in Grand Committee that we hoped to bring forward amendments to reflect the outcome of the Government's consultation on narrative reporting as soon as practicable. I am pleased that we have been able to do so in time for Report to give the House the opportunity for debate before the Bill passes to the other place.
	Our proposal on narrative reporting, which Amendment No. 196 will add to the requirements for the content of the business review, represents consistent and balanced policy in light of our recent consultations and discussions with interested parties. Our aim has always been to encourage meaningful, strategic, forward-looking information to assist shareholder engagement while avoiding disproportionate burdens on business, in line with our better regulation agenda.
	The Government have concluded that the additional burden imposed by the statutory OFR requirement is not justified in the light of the competitiveness of UK business. Amendments Nos. 200 to 202 and the consequential amendments will therefore remove the OFR provisions from the Bill. The proposed changes to the narrative reporting requirement will add value to the quality of the reporting without imposing unnecessary costs.
	As part of this package the Government will also clarify the position on liability for disclosures, both under the Companies Act and for implementation of the EU transparency obligations directive. To encourage open and meaningful reporting, it is necessary to provide certainty on the issue of liability. We expect shareholders to make full use of this further information. We want to achieve a proper balance between the ability of directors to report on their business in good faith and shareholder rights.
	The narrative reporting requirements have been streamlined so that the requirements for quoted companies are now more closely aligned to those for unquoted companies in the business review. Under the proposed new narrative reporting arrangements, all companies other than small companies will need to produce a business review as required by the EU accounts modernisation directive. The purpose of the review is to inform shareholders of the company and help them assess how the directors have performed their duty under Clause 156, which relates to duty to promote the success of the company.
	Quoted companies will need to ensure that, to the extent necessary to understand the development, performance or position of the company's business, their business review includes certain information relating to the main trends and factors which are likely to affect the business in the future and to environmental, employee, social and community matters, as set out in Clause 395(5).
	Where directors have nothing to report on environmental, employee or social and community matters, the review must say so. Auditors will continue to be required by Clause 487 to report on the consistency of the directors' report, including the business review, with the accounts, as is required by the EU directive, but there will be no additional requirements to check for inconsistency. This preserves the £30 million saving made by repealing the requirement for an OFR under the Companies Act 1985. All companies will be exempted from disclosing in the business review information that is seriously prejudicial to the company's interests. That extends to all companies. The exemption previously only provided for quoted companies producing an OFR. This will also mean that companies would be exempt from any disclosure that would prejudice national security.
	There will also be no statutory reporting standards for the business review as there were for the OFR. It is important to emphasise that the new narrative reporting proposals seek to enhance the narrative reporting without imposing unnecessary burdens on companies. In bringing forward these new measures we listened carefully to the concerns and wishes expressed by a wide range of business groups, shareholders and other interested parties. We also paid careful regard to the remarks made by noble Lords in Committee, and considered them closely.
	I turn now to the amendments to the new clause tabled by the noble Baroness, Lady Noakes. I am grateful to her for tabling Amendment No. 197, as it gives me the opportunity to explain the Government's rationale behind specifying the purpose of the business review under the new subsection (2). Our reasons are twofold. First, specifying for whom the business review is intended is an important part of the package concerning liability. Specifying that the review is to inform members of a company is intended to make clear that the business review is designed for the benefit of members as a whole so that they may exercise their governance rights more effectively. It is not designed to help individuals decide on investment decisions, nor is it targeted at the wider public in the sense that they should be entitled to rely on it, although they may well read it. The effect of the provision is to limit directors' liability to the company only, and ensure that neither individual investors nor anyone else is entitled to sue. In effect, this has codified an aspect of the Caparo judgment. We consider that making that clear will facilitate open and meaningful reporting.
	Secondly, we want to make an express link between the business review and the directors' duties under Clause 156. That clause, as we discussed yesterday, embodies the concept of enlightened shareholder value. That is relevant to reporting on matters such as the environment and employees in the business review, which my noble friend Lord Clinton-Davis drew attention to yesterday. As we explained with regard to Clause 156, the Company Law Review concluded that the success of the company could only be promoted taking due account of such factors, which reflect wider expectation of responsible business behaviour. By making the link to directors' duties, it helps to make clear that those factors contribute to the success of the company for the benefit of members as a whole, and it is in that context that directors are being asked to report on them.
	Subsection (2) is a response to the view of stakeholders during the Government's recent consultation. Business and investor groups alike called on the Government to clarify the position on liability. As I said, specifying the purpose of the business review is one element of the package to limit directors' liability. The direct link to directors' duties was pressed for by a significant number of interest groups. They echoed the Company Law Review in seeing a clear and important link between enlightened shareholder value and narrative reporting. I therefore urge the noble Baroness to withdraw Amendment No. 197.
	I applaud the intention behind the noble Baroness's second amendment. The effect would be to relieve companies of the burden of having to copy out into the business review information required to comply with the review, if it is already included elsewhere in their annual accounts and reports. We agree entirely with that aim. However, the amendment is not necessary. Cross-referencing to material included elsewhere is already allowed, and happens in practice. The Government's guidance on the business review makes clear that this is the case. We fear that making express provision in the Bill for cross-referencing would cast doubt on existing practice.
	I also reassure those with concerns about the validity of information for the business review that is included by cross-referencing. Any information that is included by reference to other materials elsewhere is subject to all the statutory requirements applied to the business review. That would include, for example, that the cross-referenced materials be subject to the same auditor's report requirements as the business review as part of the director's report, under Clause 487, and that all cross-referenced materials be circulated to every shareholder in the company and others entitled to receive the annual account or report, under Clause 404.
	I hope, in the light of this explanation and reassurance, that the noble Baroness will not press her amendment. I beg to move.

Baroness Noakes: My Lords, I state at the outset that we on the Conservative Benches support the government amendments in this group. Indeed, we even tabled some of them ahead of the Government.
	I am sure that the Minister will agree that the Government have not handled the whole OFR debacle well. It is a pity that so much time has been spent veering from one policy position to another, and satisfying none of the interest groups. I know that some of those interest groups will not be wholly satisfied with what the Government have done with these amendments. Indeed, other amendments have been tabled for discussion today which demonstrate that. However, we think that the Government have achieved the right balance.
	From the perspective of corporate reporting, the most important thing is to have certainty. Alongside certainty I particularly welcome the fact that the Government have not included the more onerous audit requirements that went with the OFR and have not introduced the reporting standard provisions. Those two provisions were drivers of the cost, which was significantly in excess of the £30 million that was initially estimated.
	The Minister kindly dealt with the two amendments that I tabled, which were probing amendments, as he correctly deduced. My first amendment probed the meaning of subsection (2) of the new clause replacing Clause 395. The Minister explained that the provision ought to demonstrate enhanced shareholder value. I was trying to tease out whether the report had to show how the directors had had regard to the various items listed in Clause 156—which we debated at some length yesterday—or whether those items had any special relevance. Ambiguity may arise in the minds of the preparers of OFRs on what precisely they have to report on. As we can see, enlightened shareholder value is already set out in subsection (5), and to some extent in subsection (6), so what is it within subsection (2) that adds to reporting on enhanced shareholder value? I stress that I seek clarity on these matters from the Government because preparers of business reviews will want to know what they have to comply with.
	I was also grateful for the Minister's response on my second amendment about whether everything had to be stuck into the directors' report, which as I am sure the noble Lord will be aware is about the most boring bit of the annual report and accounts, unless companies choose to put other material in there. Is it sufficient for the matters to be dealt with in separate reports? As I am sure the noble Lord is aware, some companies issue separate corporate social responsibility reports and separate environmental reports, which give a much fuller account than what may sometimes be a couple of paragraphs in the main body of the annual report. Will it be sufficient to refer to documents that are not physically a part of the main annual report and accounts?
	Subject to the Minister's comments on those points, I reiterate our support for these amendments.

Lord Sharman: My Lords, I congratulate the Government on rebranding a part of the Bill. To the average man in the street we now have the business review, formerly known as the OFR. I also congratulate the Government on having the balance about right. As the noble Baroness said, the issue with the OFR has always been how much was in it and the degree of certainty that there had to be over the information that was contained therein. This series of amendments gets the balance about right. It is a welcome addition and I support it.
	However, I have a couple of concerns. In introducing the amendments, the Minister said that there would be no reporting standard for the business review. I cannot believe that he honestly believes that. I think that it will just be a question of time before someone decides that we need a reporting standard for the business review; it is just the way that accounting goes, in my view. Having said that, I go back to my first remarks that the Government have got the balance about right, and I congratulate them on that.

Viscount Bledisloe: My Lords, I should like to raise one point on Amendment No. 196, which appears to me—and I am sure that I am wrong—to contain one rather serious illogicality. It basically requires a business review, which is an objective review of how the company has done, how it is doing, and the extent to which it has had proper regard for employees, environmental matters, and so on. That is a report on how the company is doing. But subsection (2) of the amendment says that the purpose of the review is to inform members of the company how the directors have performed their duty.
	A report on how the company is doing may not in any way tell you how the directors are doing. A company may be doing very well because it has excellent managers, or because the economic trend has favoured it tremendously, or because its product has suddenly become very desirable for outside reasons. Although it is doing very well, the directors may have met three or four times a year for a quarter of an hour, nodded through the business in front of them without having read it, and then retired to a very good and perhaps rather over-refreshed lunch. The fact that you are told how the company is doing does not tell you at all how the directors are doing. Surely subsection (2) is an illogicality. While not asking the noble Lord to deal with the matter today, I ask him to consider whether subsection (2) really does logically fit, in the way that it is worded, with the rest of the amendment.

Baroness Northover: My Lords, I support Amendment No. 196 and related amendments, and I urge the Government to go further. The Company Law Review recommended what became the OFR, and we have had a debate on that. The DTI drew it up; business welcomed it by and large—and that itself was welcome—but then the Chancellor knocked it back in November. We are now in a rather unique situation where on the one hand the Government are taking away sections of the Bill but on the other they are putting bits back in again, by the back door, as it were.
	It is to be welcomed that they are retaining some of those elements, given that they plan to take out the OFR. It is clearly welcome that environmental and community concerns will come within the business review, and I echo what my noble friend Lord Sharman said in welcoming where this has got to. But I remain concerned that certain elements are not here. I hope to be able to address some of those in the next group. It is clearly vital that we improve the transparency and accountability of companies, especially in relation to the environment and where businesses are working in developing countries. Of course there are enlightened companies, and it is notable that many of them have welcomed the idea of the reports. We are all familiar with unenlightened companies, and I mentioned yesterday those working in the DRC. The more that we can do to promote transparency and accountability in British companies through this Bill the more welcome that will be, and the easier it will be to try to bring such companies to account.

Lord Dubs: My Lords, I give a broad welcome to Amendment No. 196, but if it had gone a little further, the amendments in the next group might not have been necessary. There are two points on which I would like to ask my noble friend for a little more information. In his introductory remarks, he used the words "other than small companies". What does he mean by that? My understanding is that the Government were talking about 1,500 companies, and I would have wished to argue that the scope of the amendment should have gone as far as 37,000 companies. That would still exclude the small ones but it would include the bulk of the companies to which this amendment would appropriately apply.
	Secondly, I endorse the comment from the Liberal Democrat Benches that it is a pity that Amendment No. 196 does not include reporting standards. Surely it would be desirable to have them, and I hope that my noble friend can give us some reassurance on that.

Lord Phillips of Sudbury: My Lords, I hesitate to make my first contribution to this mammoth debate at this stage, but one of the prices of running major legislation in the Moses Room as well as in this Chamber is that those who are engaged on other Bills are excluded from participation in mainstream Bills such as this, and I was heavily involved in the Identity Cards Bill.
	Having said that, I, too, am cheered by the extension that Amendment No. 196 makes to the Bill—in particular, subsection (5). That subsection seems to be completely new and to embrace many of the issues contained in Amendment No. 194B to be addressed by my noble friend Lady Northover in the next group. However, I have the sensation that if Amendment No. 196 is passed, Amendment No. 194B may fall, but no doubt the Deputy Speaker will comment on that.
	My questions to the Minister are twofold. First, the requirements of subsection (5) are confined to a quoted company, and in time it may be found that that is too restrictive. I believe that the majority of the British companies named in the OECD report on operations in the Democratic Republic of Congo were not publicly quoted companies. It might be interesting if the Minister would comment on that.
	My question concerns the formulation at the start of subsection (5), which says:
	"In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position",
	and so on. It seems to me that the phrase "an understanding" is a bit limp. I would have hoped that we would be talking here of "a rounded understanding", "a comprehensive understanding" or even "an adequate or reasonable understanding". Without some qualifying objective, "an understanding" represents such a low hurdle that it is almost impossible to conceive how it will not be taken unless there is a complete ignorance of the factors mentioned in paragraph (b). Perhaps the Minister will comment on that, although I shall quite understand if he wants to do so outside the Chamber after the debate.
	The second point on which I ask him to enlighten us concerns the final three lines of subsection (5), which say:
	"If the review does not contain information of each kind mentioned in paragraph (b)(i), (ii) and (iii), it must state which of those kinds of information it does not contain".
	That is a slightly gnomic formulation. I wonder whether, if I understand it aright, it should not merely say that it does not contain that information but why it does not contain it. Again, it seems extraordinarily ineffectual to leave it at that.
	Finally, there is an issue which concerns the independent contractors of British companies abroad. I perfectly accept that the proposed new Clause 395 addresses the position of the company's employees, and that that includes the company's subsidiaries' employees, but it does not appear to cover independent contractors. In most third-world countries where there is serious abuse of overseas workers, they make sure that they are not employees but so-called independent contractors, although under British law that might be an extremely doubtful arrangement. Under indigenous law, they will indeed not be employees.
	This morning, I had a message from Mr Saunders who is the company secretary and general counsel of Oxfam, who said that,
	"when some companies outsource parts of their business, they often try to outsource any responsibility for their social . . . impacts".
	He mentioned cases where women and men are forced to work under punishing conditions in factories to meet the demands of British company employers. The question is whether the formulation in Amendment No. 196 requires a reference to those circumstances. I see that there must be information about social community issues. The Minister may be in a position to assure me that that will be sufficient to bring the position of those so-called independent contractors within the purview of the directors' report.

The Lord Bishop of Chester: My Lords, from these Benches, I add my thanks to the Government for their Amendment No. 196. Like the noble Lord, Lord Phillips, I was slightly puzzled about the order in which we are doing things, because I understand that Amendment No. 196, which would replace Clause 395, will not be moved until Clause 394 has been discussed. We shall discuss the points then anyway, although many of them have been partly dealt with in Amendment No. 196, which I welcome. It brings this part of the Bill much more in tune with Clause 156 than the current Clause 395.
	To pick up the point made by the noble Lord, Lord Phillips, the question on the use of contractors also relates to associated companies and subsidiaries where there is only a minority stake. It would be good to hear what the responsibilities under the prospective new clause would be to companies in relation to subsidiaries and associated companies that are not wholly owned.
	Amendment No. 196 is very important. It is significant not only to Oxfam but to a number of other organisations that have made representations to me. In the future, in our increasingly global world, the way in which multinational companies operate in other countries will have a huge impact beyond their own immediate concerns and those of their shareholders. The sort of imbalances that can be set up in a world in which information and the movement of people is ever increasing means that there will be a need for multinational companies increasingly to pay attention to the wider social and environmental impacts of their activities. I am pleased that Amendment No. 196 extends the current Clause 395 to speaking about the communities in which companies operate and not just on issues of the environment and employees. There is ample evidence from Scandinavia, for example, that it is perfectly possible to be successful economically while giving a high profile to the wider social and economic responsibilities that companies bear.
	We thank the Government from these Benches for Amendment No. 196. To save me speaking again, let me say that Amendment No. 194B usefully sets out the implications of Amendment No. 196 if it is accepted.

Lord Sainsbury of Turville: My Lords, I shall deal first with the important point raised by the noble Baroness, Lady Noakes, on the cross-referencing of material. I hope that I have dealt with that by saying that any material that is cross-referenced is subject to the same statutory requirements applying to the business review. That will include, for example, that cross-referenced material be subject to the same auditors' report requirement as parts of the directors' reports, and that cross-referenced material be circulated to every shareholder of the company and others who are entitled to receive the annual report and accounts. I think that that covers the point. Yes, it can be in separate material but it has to take the same account of issues.

Lord Phillips of Sudbury: My Lords, I am grateful for the Minister giving way. Is it right to assume that cross-referencing is specific and targeted, and not merely to page 155 or whatever? That could be pretty useless to a lay reader of the document.

Lord Sainsbury of Turville: My Lords, we have not yet got to that point. I am sure that when we do, the attempt will be to make that as intelligible as possible. The key point is that it would have to be circulated in the same way as other material. You could not simply refer to a document which people had not received.
	The noble Viscount, Lord Bledisloe, I think, lives in a different world from the one that we live in. In the world in which I live, at least, there is thought to be a relationship between the managers, their performance and the performance of the company. That is rather important and fundamental to this whole Company Law Reform Bill. If we do not believe that, it is, frankly, not worth spending a lot of time on this Bill. That is the assumption. Of course, there will be cases where companies do well despite their directors' efforts. However, the fundamental principle of company law is that directors are responsible for the company and manage it. Speaking for most directors, the picture he paints of their meeting rarely and going off and having a nice lunch is really unfair. In the world we live in, directors bear a heavy responsibility, in many cases putting in long working hours because they believe passionately that their performance affects that of the company.

Viscount Bledisloe: My Lords, of course I accept that that is how a company should be run. Fortunately, I think I can say that whenever I was a director that was how the company was run. However, that does not alter the fact that a report which merely says that the company is doing well does not necessarily reveal that the directors are doing their duty at all. That was the only point I was making.

Lord Sainsbury of Turville: My Lords, with all respect, where one is talking about performance indicators, it will become clear. That is partly what the business review is about: what is due to external circumstances, and what is due to key performance indicators showing how the business is run.
	On the point of the noble Baroness, Lady Noakes, subsection (2) of new Clause 395 is quite clear. The purpose of the business review is to inform members of a company and to help them assess how the directors have performed their duty under Clause 156, providing information showing how well they have done. As regards SMEs, the criteria are that an SME must not have turnover of more than £5.6 million, a balance sheet of not more than £2.8 million and not more than 50 employees. I am not certain that I can cross-reference that exactly to the number of companies in each category, but it is important that we simply exclude those companies.
	The noble Lord, Lord Phillips of Sudbury, raised a question about "understanding". It is a rather limp phrase, coming straight from Article 46 of the fourth directive, as amended. We do not need to gold-plate that, or go into great detail. It gives the answer we need. We have dealt with the cross-referencing. A lot of work has been done on reporting standards. In fact, we found that it did not greatly add to what was already set out and, to the extent that it did, it simply seemed to be adding on responsibilities rather than clarifying the situation. We want to avoid that. I hope that has dealt with the main issues that noble Lords have with this clause.

Lord Dubs: My Lords, before my noble friend sits down, what about the number of companies that will be covered by this?

Lord Sainsbury of Turville: My Lords, I cannot give my noble friend an exact figure. If you start excluding SMEs in the categories that I mention, you already exclude a huge proportion: 98 per cent of British companies, I think. My noble friend mentioned a figure of about 30 million. I cannot comment on that, but I will let him know what the figures are.

The Lord Bishop of Chester: My Lords, before the Minister sits down, will he comment more directly on the use of contractors or employees of associated or subsidiary companies in which there may be a minority holding, and so forth? How far will these provisions apply to that wider range of associates of a company?

Lord Sainsbury of Turville: My Lords, we feel that it is necessary to draw the line somewhere. When we consulted on this, the practicalities made monitoring the performance of contractors an impossible task and there was no desire to extend monitoring to them. Where there is a group company, these provisions extend to the group. But if one starts to try to monitor the policies of all a company's contractors against these standards, it is impossible.

On Question, amendment agreed to.
	Clause 395 [Contents of directors' report: business review]:

Baroness Northover: moved Amendment No. 194A:
	Page 180, line 6, leave out "where appropriate,"

Baroness Northover: My Lords, in speaking to Amendment No. 194A, I shall speak also to Amendments Nos. 194B and 314A, which are tabled in my name and the names of my noble friend Lord Razzall and the noble Lord, Lord Dubs, and to Amendment No. 194C, which is tabled in my name and the names of my noble friend Lady Miller of Chilthorne Domer and the noble Lord, Lord Dubs.
	These amendments fill in some of the gaps left by the proposed removal of the OFR, even if we shortly agree to add the business review. Amendment No. 194A would delete the words "where appropriate". The information required to be supplied under this subsection is already qualified by the use of the phrase,
	"to the extent necessary for an understanding of the development, performance or position of the business of the company".
	The words "where appropriate" are superfluous and may weaken that requirement.
	Amendment No. 194B would delete the words,
	"environmental matters and employee matters",
	and would insert a more detailed specification of what should be included. The requirement for companies to provide information on social and community issues, which has been referred to, was included in the OFR regulations, but is absent from the business review provisions as currently drafted. That means that there is no requirement for companies to report on the impact of their activities on any communities in which they operate, including on any related human rights issues. In addition, the requirements, as currently drafted, to report in the business review on environmental matters are weaker than those under the OFR regulations.
	The business review requires the provision of information on environmental matters,
	"to the extent necessary for an understanding of",
	a company's,
	"development, performance or position".
	However, the OFR also required the provision of information on the impact of the business of the company on the environment to the extent necessary for such an understanding. This amendment refers to the social aspects, to which we believe explicit reference should be made, the impact of the company's activities on the environment and, as my noble friend Lord Phillips said, the persons with whom the company has contractual or other arrangements that are essential for the business of the company.
	The proposed new Clause 395(4)(b)(iv) requires the inclusion of information on,
	"the areas described in sub-paragraphs (i) to (iii) and the extent to which those policies have been successfully implemented",
	because companies could easily introduce policies to address those issues simply for PR purposes. This provision, which is also in the OFR, is vital to ensure that companies cannot pay lip-service to such policies without serious intentions of implementing them.
	Amendment No. 194C would delete Clause 395(7), which would mean that the provisions applied to medium-sized as well as large companies. This issue has been mentioned by the noble Lord, Lord Dubs. Where medium-sized companies impact these factors, we believe that they should be required to report on them.
	Amendment No. 314A concerns the auditing of what I have just described. The auditing requirements for the business review are less stringent than those for the OFR. The OFR regulations require, first, a consistency check—that is, a check by the auditor that the information provided in the OFR corresponds with the available evidence—and, secondly, consideration by the auditor about whether any other matters that have come to his attention during the audit were inconsistent with the information provided in the OFR. The Government asserted that that second check was necessary to provide adequate assurance for investors and other users. However, the second check is not part of the audit requirements for the business review included in the current draft. That is why I also put forward this amendment.
	So, in the interests of transparency—a matter I have mentioned before—and corporate responsibility, for the reasons we all know, and in the interests of putting back in some of the protection that was provided in the OFR in the first place, I commend these amendments to the House. I beg to move.

Lord Dubs: My Lords, I support what the noble Baroness, Lady Northover, said. Of course none of us wants to rush in and impose an additional heavy bureaucratic burden on companies. We are not doing that with these amendments, but we are seeking to elaborate a little on the main thrust of Amendment No. 196, which we were debating, to add a little more precision as regards environmental responsibilities, as in Amendment No. 194B, and to bring within the net some of the companies that would be excluded from Amendment No. 196. I commend the amendments to my noble friend.

The Earl of Sandwich: My Lords, I do not want to prolong the discussion, which has been had many times over. The case for the comparison with the OFR has been very clearly stated by the noble Baroness, Lady Northover. As I said yesterday in our discussion of Clause 156, which in a sense is still linked to this debate, there is a strong coalition in favour of these amendments, although I think that it will warmly welcome the new government clause. I remain convinced that companies should not only report on but also take account of their impact on the environment and communities. This new form of business review, welcome as it is, will certainly help, but it does not, of course, cover the fundamental issue.

Baroness Tonge: My Lords, I support the amendments tabled by my noble friends. Having been shadow Secretary of State for International Development in the other place for nearly eight years, I would like to commend to the House the work that the Government have done on international development. There is no question in my mind but that they have made huge progress and have been extremely committed to international development. More progress has been made on debt than any of us dreamt of, and the commitment to aid is one of the best for many decades.
	One of the main engines for development nowadays must be industrialists and companies operating in developing countries. You only have to look at Britain in the 19th century to see what developed us. We did not just think off the top of our heads that education and public health were a good idea; the drive came from the needs of big companies and industrialists operating in our towns and cities to have a better-educated and healthier workforce.
	It is terribly important when our companies—medium-sized as well as big—are operating in developing countries that they should be mindful of their huge responsibility in that country and of how much difference they can make. Sometimes I have read the brochures produced by the companies. They are admirable; the companies are well aware of the social and environmental consequences of their actions. However, when you go to those countries, sometimes what the companies say is not actually happening on the ground. Therefore, I think that it is very important that we tighten up a little bit how those companies operate.
	The OFR was welcomed by everyone—by the NGOs and by the Opposition—so we were incredulous when it was suddenly withdrawn. It seemed so strange that the OFR should be withdrawn.

Lord Gordon of Strathblane: My Lords, I thank the noble Baroness for giving way. To say that the OFR was welcomed by everyone is, I fear, nonsense. The business community was up in arms about it. The auditing profession was up in arms because it was being asked to audit opinions about the future rather than facts about the past. So it was certainly not universally welcomed.

Baroness Tonge: My Lords, it was not universally welcomed by companies. What I implied is that it was universally welcomed by those people who wanted developing countries, their workforces and their environment to be protected. I also understood that many companies had already started to prepare their OFRs and were rather shocked that it was suddenly withdrawn.
	Nevertheless, we are now discussing the business review and I welcome government Amendment No. 196. It recognises that something had to be done and that markers had to be put down on these issues. Our amendments have been tabled because we feel that that amendment does not go quite far enough. It needs to be tightened up. Like my noble friend Lord Phillips, I find it quite difficult to understand the opening paragraph of subsection (5) of Amendment No. 196. I read it as saying that everything is being done in the interests of the company's business. It should also be done in the interests of the country in which the company is operating.
	I very much hope that my noble friends' amendments will be considered by the Government, especially before the Bill goes to the other place, where I am sure there will be very similar debates to those that we have had here.

Lord Clinton-Davis: My Lords, Amendment No. 194B does not add very much to what the Government have already said. I am deeply concerned about environmental matters and I am deeply concerned about employee matters. But I really do not know why it is asserted that the amendment adds anything to the obligations that are already imposed. I see no value in putting in other words than those that the Government assert to be essential. My noble friend's amendment is perfectly adequate.
	However, I am a little concerned about the words "where appropriate". Perhaps my noble friend can tell the House exactly what is meant by that.

Lord Phillips of Sudbury: My Lords, I briefly return to the issue of independent contractors, which has now been raised by several speakers. When winding up on government Amendment No. 196, the noble Lord, Lord Sainsbury, said that to try to bring into the directors' reporting requirement people who were not employees was too far and too complicated for the companies.
	I perfectly understand the gist of what the Minister is saying; I am a director of several companies myself. No one is trying to throttle the poor old companies and prevent them from doing their work. However, he will agree—this cannot be contentious—that when one is dealing with certain third-world countries, there are no employees according to local law. They are not employees; they are independent piece workers. Dare I say that some companies trade off that? They may not employ more than a single employee in the country concerned, and that person will be an expatriate. I therefore ask whether the Government will at least think about this.
	The noble Lord, Lord Clinton-Davis, said that Amendment No. 194B added nothing substantial to the government new Clause 395(5), but I think that he will agree that paragraph (iii) of Amendment No. 194B attempts to get at the difficult issue of contractors of companies working in overseas countries. There may be a way of dealing with this practically by indicating, obviously at the last stage of the Bill, that "employees" in the Government's amendment means "employees" as defined by UK law. I do not think that that would place a burden on companies at all, because the Government's intention is that employees, as we understand the term, are to come under the reporting requirements of the directors.

Lord Sainsbury of Turville: My Lords, the noble Baroness has tabled some interesting amendments that echo amendments tabled in Grand Committee, to which several Members of the House have spoken. The amendments would strengthen the requirements of the business review and reintroduce elements of the operating and financial review. However, I fear that this would impose unduly onerous burdens on all companies, not only quoted ones. The OFR was originally a requirement for quoted companies only. No evidence from the Government's recent consultation on narrative reporting suggested that any requirements to report on specific information relating to the environment, employees, and social and community matters should apply to a different set of companies.
	We made it very clear yesterday in our discussion on Clause 156 that we are determined that the essential duties of directors should be clear, and we have made the link between that and the business review. The business review is therefore clearly positioned so that people can judge how well directors are doing against those duties. I think that it would be sheer folly to pile unrealistic and onerous reporting duties on them.
	On the point about contractors, many companies I know of have 500 or 600 contractors and others working for them in disparate relationships. The idea that directors are required to have some kind of responsibility not only to provide a good service but to have regard to the environment and all other policies is quite impossible. In any case, it is for those companies to answer for their responsibilities. What the amendments suggest is simply not feasible or practical. If we are going to make the business review work sensibly, we must be very clear about what is practical and sensible and not place too great a burden on companies.
	Amendment No. 194A, which would remove the words "where appropriate" from the beginning of subsection (4)(b) of Clause 395, would remove the directors' ability to judge whether it was appropriate to include analysis using non-financial key performance indicators in the business review. That would make the provision much more onerous than the EU accounts modernisation directive, and we do not think that that is justified. New Clause 395, in government Amendment No. 196, provides that, where directors of quoted companies do not consider certain information to be material, they must say so in the review. We think that that is the way in which to do it, because that will be a prompt to directors to consider such matters.
	Amendment No. 194B would require all companies to include analysis using key performance indicators of the impact of the company's policies and activities on the environment, on the communities they operate in, and on employees and other contractual arrangements, as well as the extent to which such policies have been successfully implemented. Elements of this are now incorporated into the new business review in Clause 395. But, again, we have included them for quoted companies only. We see no justification for imposing on other companies requirements over and beyond what the EU directive requires. That is not to say that we do not think other companies should be reporting less. We have rationalised the narrative reporting requirements in one place under new Clause 395. Although the information specified under subsection (5) is required of quoted companies, there is nothing to prevent other companies from providing this level of information, too. Indeed, we hope that they are encouraged to do so.
	Amendment No. 194C would remove the exemption for medium-sized companies from having to disclose non-financial KPIs. The exemption is an option that the EU directive allows member states in implementing the business review requirements. Again, we see no justification for not granting this exemption in the UK. Not to do so could hinder the competitiveness of UK plc.
	We recognise that the CORE coalition, the TUC and some other interest groups called for all or some of the OFR provisions to be reinstated or inserted into the business review, as the noble Baroness's amendment seeks to do. However, some business organisations argued strongly against reintroducing the OFR reporting burdens. That is not to say that companies were against the OFR in itself. Quite the contrary: many companies remain supportive of the OFR and already produce voluntary OFRs. Their contention was to avoid reimposing the undue cost burdens of the statutory OFR.
	We have therefore elaborated on specific information relating to environmental, employee, social and community issues to be included for a better understanding of the company's business. This is the basic level of information that we would expect quoted companies to include in their business review. But if the directors consider that such information is not necessary for a better understanding of the company's business, they may say so and not include it. This is a matter for the directors' judgment.
	Finally, Amendment No. 314A would require the auditor to report on any other matters that are inconsistent with the information provided on non-financial KPIs that have come to their attention. We see this as reimposing a significant burden. The matter of the audit requirements was raised by a majority of the respondents to the Government's recent consultation. Some called for an audit opinion stating not only whether the business review was consistent with the accounts, but also that there were no inconsistencies with matters identified during the audit. That had been the level of audit scrutiny for the OFR. Others, however, pressed strongly for this higher level of audit requirement not to be reintroduced on the grounds of undue cost burdens.
	As I said earlier, removing the higher level of audit requirement for the OFR was a major saving of £30 million made by repealing the requirement for a statutory OFR. This is a crucial area of regulatory impact relating to narrative reporting that we have had to consider. We believe that the benefits of greater assurance on the business review do not justify the significant additional cost burdens of this additional audit check.
	We recognise that the noble Baroness proposes to limit the scope of the additional check by the auditors to reporting on inconsistencies with non-financial KPIs only, rather than on all information in the OFR. In reality, that will be no less of a burden, because the checking of non-financial information is onerous and therefore extremely costly, as I am sure the noble Lord, Lord Sharman, on the Liberal Democrat Front Bench will concede. This would be a nightmare in terms of costs and difficulty. That is why we propose that auditors should continue to be required to report only on the consistency of the business review as part of the directors' report, with the accounts, as required under Clause 487.
	We have developed what we believe to be a balanced and consistent package of proposals on narrative reporting, which reflects the outcome of our recent consultation and our discussions with interested parties. Our objective has been to ensure effective and appropriate narrative reporting without imposing unnecessary burdens on companies. We want to make a very clear statement of what we think are the principles of the directors' duties. We will stand very carefully behind that responsibility. We want to have reporting on this, but we want to do so without imposing on business a huge regulatory burden. I therefore urge the noble Baroness to withdraw this amendment.

Baroness Northover: My Lords, I thank the noble Lord for such a full reply. The noble Lord linked this to directors' duties, which we discussed yesterday when he mentioned that the Government would agree to publishing guidance for directors. At Third Reading, perhaps the Minister will outline what will be in that guidance, which might help us along.
	I thank noble Lords for their comments. I also pay tribute, as I should have done before, to the Trade Justice Movement and the Corporate Responsibility Coalition for their persistence, commitment and assistance on these extremely important issues. I will look carefully at what the Minister has said. In the meantime, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendments Nos. 194B and 194C not moved.]
	[Amendment No. 195 had been withdrawn from the Marshalled List.]

Lord Sainsbury of Turville: moved Amendment No. 196:
	Leave out Clause 395 and insert the following new Clause—
	"CONTENTS OF DIRECTORS' REPORT: BUSINESS REVIEW
	(1) Unless the company is subject to the small companies' regime, the directors' report must contain a business review.
	(2) The purpose of the business review is to inform members of the company and help them assess how the directors have performed their duty under section 156 (duty to promote the success of the company).
	(3) The business review must contain—
	(a) a fair review of the company's business, and
	(b) a description of the principal risks and uncertainties facing the company.
	(4) The review required is a balanced and comprehensive analysis of—
	(a) the development and performance of the company's business during the financial year, and
	(b) the position of the company's business at the end of that year,
	consistent with the size and complexity of the business.
	(5) In the case of a quoted company the business review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include—
	(a) the main trends and factors likely to affect the future development, performance and position of the company's business; and
	(b) information about—
	(i) environmental matters (including the impact of the company's business on the environment),
	(ii) the company's employees, and
	(iii) social and community issues,
	including information about any policies of the company in relation to those matters and the effectiveness of those policies.
	If the review does not contain information of each kind mentioned in paragraph (b)(i), (ii) and (iii), it must state which of those kinds of information it does not contain.
	(6) The review must, to the extent necessary for an understanding of the development, performance or position of the company's business, include—
	(a) analysis using financial key performance indicators, and
	(b) where appropriate, analysis using other key performance indicators, including information relating to environmental matters and employee matters.
	"Key performance indicators" means factors by reference to which the development, performance or position of the company's business can be measured effectively.
	(7) Where a company qualifies as medium-sized in relation to a financial year (see sections 448 to 450), the directors' report for the year need not comply with the requirements of subsection (6) so far as they relate to non-financial information.
	(8) The review must, where appropriate, include references to, and additional explanations of, amounts included in the company's annual accounts.
	(9) In relation to a group directors' report this section has effect as if the references to the company were references to the company and its subsidiary undertakings included in the consolidation.
	(10) Nothing in this section requires the disclosure of information about impending developments or matters in the course of negotiation if the disclosure would, in the opinion of the directors, be seriously prejudicial to the interests of the company."

Lord Sainsbury of Turville: My Lords, I beg to move Amendment No. 196.

[Amendments Nos. 197 and 198, as amendments to Amendment No. 196, not moved.]
	On Question, Amendment No. 196 agreed to.

Baroness Noakes: moved Amendment No. 199:
	After Clause 395, insert the following new clause—
	"DIRECTORS' LIABILITY
	(1) The directors responsible for preparing the review required by section 395 shall not be liable as a result of—
	(a) the review not complying with the provisions of that section relating to the preparation and contents of the review; or
	(b) any statement in the review being untrue or misleading.
	(2) Subsection (1) does not apply if the directors who signed the directors' report in accordance with section 397 knew that the provisions of this section relating to the preparation and contents of the review were not complied with, or that any statement in the review was untrue or misleading.
	(3) Nothing in this section shall impose upon any person responsible for preparing the business review a duty to update any statement which has been included in the review."

Baroness Noakes: My Lords, Amendment No. 199 introduces a new clause after Clause 395. This new clause introduces what is known as a safe harbour provision. Clause 395 concerns extended narrative reporting to improve the information that companies make available about themselves and their performance.
	When the Government first consulted on introducing an OFR, which was the predecessor to what is now Clause 395, a number of responses said that the OFR would never advance beyond legalistic boilerplate unless there was a safe harbour provision. Indeed, the Company Law Review also recommended a safe harbour provision, but the Government ignored that when they introduced the initial OFR requirements.
	We will never know what kind of OFRs might have come out of the statutory instrument that was introduced last year but withdrawn before it ever came into effect. We are clear, however, that the new business review requirements will not succeed unless there is adequate protection from legal liability.
	The Government have now introduced the new business law requirements but have not yet introduced related safe harbour provisions. Although I am well aware that, last week, the Government issued draft clauses on the liability of directors, they are not tabled for today's Report debate. Therefore, I felt it would be important for your Lordships' House to have an opportunity to debate the key features of a required safe harbour provision for a business review in the hope that whatever the Government bring forward for Third Reading will be satisfactory. I hope the Minister will outline the timetable for the new clauses and confirm that he will be tabling an appropriate amendment at Third Reading. We feel it would be inappropriate for this Bill to go to another place without a safe harbour provision.
	It will be clear that Amendment No. 199 is a probing amendment. When I tabled the amendment in Grand Committee the debate proceeded on general principles, not on the specifics. I am aware that the Government's draft clause is structured in a different way and, hence, is not directly comparable to Amendment No. 199. I shall not be arguing that the structure and scope of my amendment are superior, but I would like to draw the Minister's attention to subsection (3) of my amendment, which relates to the updating of statements included in the business review. As far as I can see, there is no equivalent in the Government's draft clause.
	This subsection was drafted to ensure it was clear that the directors had no ongoing responsibility to update statements in the business review. As I am sure the Minister is aware, it is based on the provisions of Section 102 of the 1995 Private Securities Litigation Reform Act in the United States of America.
	There is common ground that the most valuable aspects for a business review will be the insights it gives for the prospects of a company. So it is quite likely the information that is given about the prospects of the company will be overtaken by later information. Let us suppose that information is given about a company's market share based on trade association data, which several months later are revised and the market share is, thus, a smaller or larger figure. Alternatively, the company may comment on the relationship of its business to GDP growth but an oil price shock or something similar comes along, which destroys that relationship. Clearly, if that puts a company into profit-warning territory, there are already market obligations to update shareholders about the changes. But all sorts of changes that have been put into a business review would not put a company into profit-warning territory.
	So the question arises whether the directors have to do anything if circumstances change after the business review has been prepared. My amendment makes it clear that they do not because anything else would require the directors to have their eyes firmly on the rear-view mirror, which is the very antithesis of what they should be doing to promote the success of the company. I hope that the Minister will explain the Government's position on the correction of information once it has been published. I beg to move.

Lord Clinton-Davis: My Lords, even though it has been said that this is a probing amendment, it is still the duty of those moving it to ensure that such an amendment can be of some value. What is proposed in subsections (1) and (2) represents an incentive for carelessness, or even worse. The situation is not wholly or even partly saved by subsection (2). Frankly, despite what the noble Baroness has said, I cannot comprehend how this amendment came to be tabled. I think it is absurd. Why should the directors be free of liability in the circumstances envisaged? That has not been explained at all by the noble Baroness, although of course I await with interest to hear what the noble Lord, Lord Sharman, has to say about it. But as I have said, I think the whole thing is absurd.

Lord Sharman: My Lords, I am grateful for that intervention because I support the amendment in its totality. When we go back to the remarks made by the noble Lord on the Benches opposite about the welcome or otherwise of the OFR, one of the key issues of concern was the degree of care and the degree of liability attaching to it. If you want anything other than boilerplate reporting—it has been stated on numerous occasions in the debates on the Bill that what we are looking for is a development of narrative reporting; I stress the word "development"—we are not going to get to a fixed point in time with it. The process will develop over time. If you want that to take place and to address the issues that my noble friend Lady Northover and the right reverend Prelates opposite have been talking about, there must be some degree of protection. Otherwise all you will get—I would have thought that the noble Lord, Lord Clinton-Davis, with his background as a practising lawyer, would have understood this—will be volumes of things known as completion notes or proof of notes. With those you can go back and relate every single comment in the report to something that can be substantiated in detail and with an audit trail. If that is what we want, fine; we will get it.
	But I do not believe that is where we want to go. I believe that we want to get to better narrative reporting and to see that process develop. To do that, it is absolutely essential to provide what I call a safe haven and the noble Baroness, Lady Noakes, calls a safe harbour, but we shall leave that to one side. Again, I support the amendment and I note that it is probing in nature. We look forward to hearing what the Government have to say and what they may bring forward at Third Reading.

Viscount Bledisloe: My Lords, I am impressed with what the noble Baroness had to say about subsection (3). It is essential that there should not be a duty to update the entire time, otherwise at what stage does one do so? Should one do that when one sees a change of 1 per cent, or perhaps of 5 per cent? One would be issuing something the entire time and, as the noble Baroness pointed out, spending most of the time in board meetings looking back at what had been said rather than looking at the future.
	However, I am somewhat surprised by the second half of subsection (2), although not to the same extent as the noble Lord, Lord Clinton-Davis. It seems surprising to say that someone is not in any way liable for a statement which is "untrue or misleading" unless they actually knew that it was. Is there to be no duty on directors looking at these reports to say to themselves, "Cor, that looks pretty surprising. Are we really right to say that we are going to make twice as much money next year? The sales prospects do not accord with what I thought was the atmosphere three months ago at the last board meeting"?
	I fully see that the duty should be limited because otherwise, as the noble Lord said, the review could become 400 pages long, 346 of which would be drafted by lawyers merely to provide one with a defence if one was sued on it. However, I think there should be, perhaps, some liability if a director fails to notice that what is being said seems wholly inconsistent with what had been said at all previous board meetings. He should take some care to ensure that the statements are not untrue or misleading, but I do not quite see how this ties in with a general duty of care. I agree that the general duty of care must be limited, particularly in the case of a non-executive director or a director who is not the production director in relation to finance and so on. He should not have to go in and second-guess the man who drafted the statement and whose expertise it is.

Lord Sainsbury of Turville: My Lords, unlike some noble Lords, I very much understand the important issue raised by the amendment—that is, that there need to be clear limits to the liability of directors in connection with the business reviews. As was discussed in Grand Committee, there is a broadly held view that it would facilitate open and meaningful reporting if there was clarity on liability. We have been discussing this issue with interested parties. It is clear that it is unhelpful to look at liability for business reviews under company law in isolation from other reporting and disclosure requirements, including disclosures which will need to be made once we have implemented the transparency obligations directive. What is needed is a coherent and consistent regime.
	In developing such a regime there are some key factors we must consider. First, there is the risk that, with too strict a liability for narrative reporting, company directors will tend to make caveats and heavily qualified statements, which could impose needless bureaucracy without achieving meaningful forward-looking statements. The same risks apply if the potential liability is unclear.
	Secondly, if we clarified liability for some aspects of reporting and not others, this could make the position worse. It is desirable to provide consistency in liability across the directors' reports and other narrative reporting under the Companies Acts as well as the transparency obligations directive implementation disclosures. We would still require a stricter liability regime for prospectuses as required under the prospectus directive as prospectuses are intended specifically to inform investment decisions and invite purchases of securities of the issuer.
	Thirdly, the nature of narrative reporting, which involves trying to predict future performance, with its inherent uncertainty, is different from accounts reporting, which is, to a much greater extent, objectively determinable. There is also difficulty in drawing a clear line between past performance reporting and forward-looking statements. It is an extremely complex area.
	As the noble Baroness will be aware, we have issued draft clauses for comment by interested parties covering provision for liability, both under Part 15 of the Bill for directors' reports, directors' remuneration reports or summary financial statements derived from them, and for disclosures under transparency obligations directive implementation. In both cases, these provisions ensure that directors will only be held liable for untrue or misleading statements and omissions made in bad faith or recklessly, and where there is deliberate and dishonest concealment. This is very close to what the noble Baroness is proposing. However, our proposals go further in seeking to provide clarity for those to whom the director may be liable.
	In that context, let me deal with the question of updating. We have not included anything on updating because there is no implication that you have to update reports. If we were to include it in relation to the business review, it could imply that there is a need to update other reports and accounts. Depending on the response of interested parties, we shall consider what measures on this might be brought forward for inclusion in the Bill. It would be unwise to rush today into introducing measures seeking to limit liability. We need to ensure that we set the hurdle for any potential legal challenge high enough so that directors can feel confident in what they say in their reporting but not so high that there is little incentive to be careful. In practical terms, we would like to bring forward clauses at the earliest opportunity but will wish to consider, in the light of responses from the interested parties, whether we can do that in time for Third Reading. I therefore hope that the noble Baroness will withdraw the amendment.

Baroness Noakes: My Lords, I thank the Minister for that reply and all noble Lords who have taken part in this debate. I apologise to the noble Lord, Lord Clinton-Davis, for not having fully explained the amendment. I dealt with my amendment in a rather shortened form on the basis that several of us here had been through it in Grand Committee and did not need to hear it all again, and I focused on the one point that I wanted to put to the Minister today. I thank the noble Lord, Lord Sharman, for his support. I take the point raised by the noble Viscount, Lord Bledisloe, about subsection (2). I think that he will find that the Government's amendments, which are currently in draft, deal with that point. We wait to see what the Government will produce.
	I would like to think about updating in greater detail. The US provisions have an explicit non-updating provision, which is why a number of people will be looking for one. Forward-looking statements expose directors to a greater degree of susceptibility to potential update and raise different issues from, say, updating judgments that were in the audited accounts where a line is necessarily drawn to produce financial statements.
	I was disappointed at the Minister's hint that the clauses would not be ready for Third Reading, which is only a couple of weeks away. I said in my opening remarks that we would not want the Bill to go to the other place without a safe harbour provision. So I hope that the Government will feel able to table for Third Reading—

Lord Sainsbury of Turville: My Lords, the problem with hints is that they are only hints. I thought I had made it clear that we would try to bring the clauses forward if we could but this is such a serious issue that we would not want to rush into doing so just to achieve that goal.

Baroness Noakes: My Lords, we are so used to reading ministerial code that when Ministers do not give a positive commitment to tabling provisions at Third Reading, it usually means that they are not going to. I apologise if I have over-interpreted what the Minister has said. We have had a useful debate on the subject; this is an important issue and we look forward to debating it again at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 398 [Duty to prepare operating and financial review]:

Baroness Noakes: moved Amendment No. 200:
	Leave out Clause 398.
	On Question, amendment agreed to.
	Clause 399 [Objective and contents of operating and financial review]:

Baroness Noakes: moved Amendment No. 201:
	Leave out Clause 399.
	On Question, amendment agreed to.
	Clause 400 [Approval and signing of operating and financial review]:

Baroness Noakes: moved Amendment No. 202:
	Leave out Clause 400.
	On Question, amendment agreed to.
	Clause 402 [Contents of directors' remuneration report]:

Lord Lea of Crondall: moved Amendment No. 203:
	Page 183, line 20, at end insert "; such information to include—
	(i) an analysis of the general pattern of remuneration in the enterprise and how that has been taken into account in determining directors' remuneration;
	(ii) equivalent information on all subsidiary companies,"

Lord Lea of Crondall: My Lords, I think this amendment could be agreed to without too much discussion. The last pay statement summarising the position of Britain's 350 largest companies showed that directors' pay increased by 18 per cent last year, compared with 4 per cent for the average. Four per cent may be the average technically and politically, but common sense tells us that that average includes people on many millions. We should be talking about the median. It is not so straightforward a statistic to produce quarterly, but it is much less than the average.
	The growth of inequality between the median and the top 1 per cent has been going on for many years, and one would obviously question its justification. I draw your Lordships' attention to an interesting article on the United States by Samuel Brittan in the FT on 10 February. It showed how the median worker there had not benefited at all from the increases in the so-called average, because the increases were all at the top; in other words, the inequality is exactly the same, if not even greater, on the other side of the Atlantic in the iconic Anglo-Saxon country. Brittan was reluctantly driven tacitly to reflect the view—he has confirmed it to me subsequently that this is a proper reading of his article—of a US commentator that this was down to,
	"mutual pay determination by an exclusive cabal of chief executive officers".
	That is not the language of a middle-of-the-road person such as me—I do not normally use the language of these firebrands—but it is what he said. He summed it up as,
	"if you scratch my back, I'll scratch yours".
	I think that we know what that means.
	All sorts of codes have been drawn up in recent years—I shall read from one of them shortly. It is not just people who are somehow left of centre—I do not know whether I include the Liberal Democrats in that these days—who are raising this issue. The director of investment affairs of the Association of British Insurers recently said that there would be,
	"detrimental consequences if the premium commanded by executives rises too far above general levels of pay in the economy . . . It can't go on forever without something snapping".
	Another interesting observation was made by the Co-operative Insurance Society, which gives advice to people asking questions of boards of directors. It stated, with tongue in cheek—noble Lords may not want to take it too much at face value—that remuneration committees are becoming increasingly innovative when it comes to maintaining executive pay growth,
	"often regardless of performance".
	I am sure that the Minister will refer to codes of practice. Members on the other side of the House will know of the standing and provenance of the Financial Reporting Council. It produces the combined code. The code is not government policy—it is even more interesting than that. As I understand it, it is the policy of accountants and the City. I do not know whether the noble Lord, Lord Sharman, can confirm it, but that is its provenance.

Lord Sharman: My Lords, the combined code is produced under the stewardship of the FSA. The Financial Services Authority is the regulatory authority for the stock exchange. When a company becomes listed, it has to sign up to the combined code. The combined code incorporates a number of things, most recently from the Higgs report.

Lord Lea of Crondall: My Lords, I am glad to have that spelt out in such an authoritative way. Paragraph B.1, which is entitled "The level and make-up of remuneration", relates to the remuneration of committees and boards. It says, under the heading "Supporting principle":
	"The remuneration committee . . . should also be sensitive to pay and employment conditions elsewhere in the group"—
	that means apart from at the board level—
	"especially when determining annual salary increases".
	Again, the noble Lord, Lord Sharman, will correct me if I am wrong, but that is therefore an obligation on companies. Am I right? He is nodding. If it is an obligation on companies, it is perfectly straightforward to assume that, unless my friends in the Government think that the Government's policy is somehow different from that, the codes that will derive from the legislation that we are discussing today should also incorporate it.
	I will say one more word about the lack of justification for what is happening with the galloping growth of inequality before I revert to what is essentially an amendment to do with transparency. Those noble Lords who were present on all those days in Grand Committee will know that there seemed to be a consensus. Perhaps the noble Lord, Lord Hodgson, and the noble Baroness, Lady Noakes, will correct me if I am wrong, but everyone seemed to say, "Transparency good, regulation bad". I am now a convert. I am on the side of the angels, more or less. I am calling for transparency, and you could not get more modest than what we are talking about here. We are not going to make extravagant claims or paint extravagant pictures of the income distribution in this country now resembling a church steeple, rather than a more traditional structure—although, come to think of it, that would not be a bad metaphor.
	It is quite difficult if you are a government Back Bencher to strike the right note. I have some experience as a government Back Bencher, and I am delighted to be joined by my noble friend Lord Whitty, who has less. We are feeling our way as to how on earth you can ever do anything useful from the government Back Benches. We are told that we are too early, that we are too late, that we are attacking the Government or that we are saying nothing useful at all, and so on. It is very difficult.
	Anyway, we have raised the matter in Grand Committee and have now refined our amendment to the extraordinarily modest proposal before noble Lords today. We think that these ratios will be seen by more and more people for what they are—namely, ratios that are not in the main justified by economic performance. There are many countries in Europe that do not have this growth. I gave detailed figures in a debate that we had recently about globalisation and income distribution. The fact is that countries such as Holland, which are at least as open market as Britain—the noble Lord, Lord Sharman, is shaking his head. Maybe he would like to intervene and tell me why.

Lord Sharman: My Lords, I apologise. I thought that the noble Lord was going to say "as open in their remuneration reporting as we are in this country". I got ahead of him, because they are not.

Lord Lea of Crondall: My Lords, I am talking about open-market economies. Some people say that of course we cannot compare ourselves with Sweden because Sweden's openness to international trade in the global sense is not the same as ours. However, as regards exposure to world trade, Holland—the Netherlands—has exactly the same structure as we do. Therefore, the justification is not to do with the rise of globalisation. Incidentally, if it were, noble Lords who argue that way would contradict themselves. On the one hand, we are supposed to think that globalisation demands that there is greater inequality. But when the point is put explicitly, people say that that is not true. There would be a huge political backlash in Britain on the question of globalisation if people thought that it led to greater inequality. The consequence of that assertion would be the growth of protectionism. We are not advocating protectionism; those people who are doing nothing about that image of globalisation are encouraging protectionism.
	That was a necessary digression, as it would constitute the only argument one could put—if there were an argument—for not accepting the degree of transparency that we are discussing. The measure does not demand justification, although people will have to analyse the figures themselves. It would give people the opportunity to observe the totality of the company's remuneration policy. I trust that my noble friend the Minister will have no difficulty in accepting the amendment. I beg to move.

Lord Sharman: My Lords, I wish to make a couple of comments on what the noble Lord, Lord Lea, has said. He chose the Netherlands as his comparator. I know that country well; I lived and worked there for the best part of 10 years and I sit on the supervisory board of two Dutch companies. My two observations are as follows. First, the oft quoted justification regarding international business concerns the movement of executives, particularly between here and the United States, and around the world. Very few senior executives in major companies in the Netherlands are not Dutch, whereas a considerable number of executives in the US are Dutch. That shows us that there has been movement out of the Netherlands. The problem of executive drain is becoming apparent. Secondly, it is always argued that further transparency is needed to keep remuneration under control. There is far less transparency on remuneration in the Netherlands than there is in this country.

Lord Lea of Crondall: My Lords, in that case I should have thought that the noble Lord would say that we ought to become the 52nd state. Obviously, Holland needs to become the 51st state and we ought to become the 52nd.

Lord Whitty: My Lords, while my noble friend has characteristically moved the amendment in a somewhat wide context, and the noble Lord, Lord Sharman, has responded in kind, I would like to point out that the amendment is, in fact, quite limited. It is not like the groups of amendments that we discussed last night and earlier today which would significantly have changed the duties of directors. I had some sympathy with some of those amendments, and my name was attached to some of them. For example, I regret the withdrawal of OFR. On the other hand, I appreciate that the Government have moved some way to recognise the concerns that the noble Earl, Lord Sandwich—who is no longer present—emphasised today.
	However, the issue that we are discussing is much narrower and falls within the existing legal requirements for directors' duties. There is a requirement to report on remuneration and to have remuneration committees dealing with certain matters. As the noble Lord, Lord Sharman, said, this matter is subject to regulation by the FSA. It is also subject to codes of practice of the FSA and of various City and other institutions. The problem is that even with that degree of attention and a significant amount of transparency—indeed, one could argue that there is too much transparency in some remuneration committee reports, at least in the sense of their being far too detailed for anyone to comprehend—the report does not convey how those directors' remunerations have been determined in relation to what else is going on within their company.
	The House will recognise that both my noble friend Lord Lea and I come from a trade union background, so in a sense we represent the view of the employees within the individual company. They would like to know how their bosses determine their own pay and to what extent they take into account the pay that they are giving to their employees, both in the main company and in subsidiaries. However, the point is actually wider than that, as my noble friend Lord Lea said. If it is the case that the executives of leading companies are going way ahead of the general level of remuneration in the rest of the economy, let alone in the rest of their company, that is damaging to social cohesion and leads to a degree of suspicion and accusations of corruption from the rest of the population.
	We should be humble enough to recognise that occasionally similar doubts and accusations arise in relation to politicians; namely, that effectively we are a cabal of people who are paying one another large sums of money for not very obvious performance-related outcomes. That case can be made in relation to directors and the way in which remuneration committees have turned out. We have had committee after committee looking at this, but none of them has specified that there should be in the remuneration report a requirement that the directors set out how they have taken into account everyone else's wages and how they determined them, and that they have at least attempted to justify the level of remuneration for the directors in the light of that information.
	This is a fairly simple point, but it goes to the heart of how you sustain both a degree of coherence and loyalty within a particular company and a degree of social coherence, respect, understanding and equity in society as a whole. While this is a narrow point, which builds on what is already there, it is very important for the reputation of our larger joint stock companies and limited liability companies. I strongly support the amendment that has been moved by my noble friend, and I hope that the Government will take into account our arguments, if not today, at least in further stages of the Bill.

Lord Judd: My Lords, for anyone who has not participated in the Grand Committee on a Bill, there should be a good deal of caution about intervening on Report, because an immense amount of work has been done by those noble Lords who were able to participate in Grand Committee. However, I found that my strength of association, feeling and support for what my noble friend Lord Lea is endeavouring to achieve in this amendment was so strong that it could make a nonsense of the Report stage if I were not simply to put on record how warmly I feel towards his argument.
	My noble friend Lord Whitty has referred to social cohesion and he has referred to respect. This is not just a matter of cohesion within a particular enterprise and the spirit of a particular enterprise. I do not understand how in the long run a successful enterprise can be sustained unless there is a feeling of fairness and reasonableness and a basis for respect coming from the leadership of that enterprise. I have been a chief executive, albeit not in a company in the normal sense; my role has been in the sphere of social responsibility and social policy. It seems to me that it is crucial for stability and success within an enterprise for fairness not only to be present, but to be manifestly present.
	There is a wider social context. We are spending a great deal of time at the moment talking about the need for more respect in society. We are being cautious in our deliberations about reflecting some of the feelings present in society as a whole. Those feelings may be fair or unfair, but there is a strong feeling about greed and opportunism. The very reasonable terms in which this amendment has been tabled are irresistible. If there is a sound basis for the way in which remuneration decisions emerge, and if there has been proper consideration of what that remuneration should be and it is clear to everyone that there has been a process that stands up to scrutiny and reflects what should happen not only for the success of the company but in relation to the responsibility of the company to society as a whole, that is great. But if that is not the case, there is a problem.
	All that the amendment does is request that what should happen should manifestly be seen to happen for all. I really cannot see how the logic of that position can be resisted.

Lord Sainsbury of Turville: My Lords, I welcome my noble friend's amendment, as it gives me an opportunity to put on record the Government's strong support for the principle that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors' remuneration.
	It has long been accepted that companies should—I quote from the Greenbury code of best practice of July 1995—
	"be sensitive to the wider scene, including pay and employment conditions elsewhere in the company".
	The Greenbury report explained why that is so important. It stated:
	"Paying over the odds is incompatible with the fiduciary duty of directors to act in the company's best interests. It can spread through normal differentials to other levels in the company, thus increasing the cost base and impairing the company's ability to compete. It can cause resentment among staff and damage the company's reputation".
	Those points are as valid and important in 2006 as they were in 1995. That is why the combined code has a supporting principle that the remuneration committee should,
	"be sensitive to pay and employment conditions elsewhere in the group, especially when determining annual salary increases".
	I entirely agree with my noble friends about the significance of that principle. It should certainly not be seen by companies as window dressing. It is important that companies analyse the general pattern of remuneration in the enterprise and take that into account in determining directors' remuneration.
	It is also worth making the point that many investors share that view. Indeed, the National Association of Pension Funds guidelines state that it is,
	"good practice for boards to disclose in their annual report the average total annual remuneration of executive directors and the average total annual remuneration of non-board employees in the financial year".
	While we do not accept the amendment, the Government will be consulting on all reporting regulations, including those relating to the directors' remuneration report, at the end of this year. I am happy to give a commitment that, in doing so, we will consult on how companies might report more effectively on the way in which they take pay and employment conditions elsewhere in the group into account in deciding directors' remuneration.

Lord Lea of Crondall: My Lords, I thank noble Lords who have taken part in this debate, in particular my noble friend Lord Judd. The final remarks of the Minister have inched us forward—or pushed us forward a few millimetres. Perhaps my noble friend's comments can be explained further when the Bill reaches the other end of the Corridor, as they were helpful. Of course, he has not made a commitment. He has said that the Government will consult on the desirability of this matter being part of the revised structure of secondary legislation. At least, I understand that that is the position. If I am right in that, we will think more about what we will say to our friends on our side of the House and in the other place. In the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Turner of Camden: moved Amendment No. 203A:
	After Clause 402, insert the following new clause—
	"CONSULTATION ABOUT DIRECTORS' REMUNERATION WITH SOCIAL REPRESENTATIVES
	(1) The Secretary of State may by regulations make provision for the board of directors of a relevant company to give notice to its members of his proposal that two or more social representatives shall be consulted by its remuneration committee on matters falling within this section, in good time before the directors' remuneration for the financial year is proposed.
	(2) After discussion with such persons as appear to him to be appropriate, the Secretary of State may propose, in a form prescribed by the regulations (either by name, description or otherwise), two or more social representatives, with whom the relevant company's remuneration committee should consult concerning its directors' proposed remuneration, having regard to such directors' duties and to the company's social responsibilities (including environmental matters and the interests of local communities) and to the interests of social stakeholders (including the company's employees) other than issues covered by collective bargaining with an independent trade union.
	(3) In this section—
	"a relevant company" means—
	(a) a quoted company; and
	(b) any other company which employs, or is a parent undertaking in a group of companies which together employ, 500 or more employees;
	"remuneration" has the same meaning as in section 402; and
	"remuneration committee" means—
	(a) any committee of or body in a relevant company which has among its functions the task of proposing the directors' remuneration for the report mentioned in section 401 above, or any similar body in a non-quoted company; but
	(b) where no such committee exists, it means the board of directors.
	(4) The regulations shall include provision concerning the right of access of social representatives to papers and information which are directly relevant to the setting of the directors' remuneration and other benefits.
	(5) Where a company rejects a proposal to engage in such consultation, it shall notify the Secretary of State, giving its reasons, and taking account of those reasons he may thereafter make new proposals to the company.
	(6) The Secretary of State may, after discussion with the company and such other persons as he considers appropriate, publish his proposals and (where appropriate) the reasons for their rejection, and any new proposals, taking such account, as he considers appropriate, of the company's claims that particular matters should not be published which might seriously prejudice its interests by reason of their confidentiality."

Baroness Turner of Camden: My Lords, this amendment, standing in my name and those of my noble friends Lord Wedderburn of Charlton and Lord Judd, has in fact been drafted by my noble friend Lord Wedderburn. He is unfortunately not well enough to come to the House, but he has been following the progress of the Bill with considerable interest. If he were well enough he would certainly be here to move it. In his absence I shall do my best to present what I think are the main arguments in favour of it on the basis of a briefing that he has supplied.
	Many may feel that much of the ground covered by the amendment has been dealt with adequately in the debate that we had yesterday on Amendment No. 79, which your Lordships approved. My noble friend Lord Wedderburn has devised another way which in effect endeavours to take the argument a stage further. The aim is also to produce a debate on the remuneration of directors, both executive and non-executive, in large companies.
	The amendment departs from adjusting directors' duties so as to be enforceable by legal machinery and aims at intervention at another point of central interest to directors—in other words, their remuneration. The amendment would apply to all quoted companies and to large companies of economic significance, a formula that the Company Law Review group applied to some disclosure requirements. The precise definitions could be changed, but some quoted companies have proposed to withdraw from listing in order to evade disclosure provisions. It would require company directors' remuneration committees to take account of the views of social representatives, or have the company explain why it cannot do so. In the past few decades, as we have already heard in the discussion on Amendment No. 203, the remuneration of directors of large companies has increased enormously. A joint statement by the British, German and Dutch trade unions on 29 May 2003 states:
	"Excessive executive pay is now an issue pressing at the very heart of European capitalism".
	The setting of directors' remuneration by committees that include directors of other companies has, despite legal requirements for independent and non-executive directors after the Higgs report, given rise to a classic case, as my noble friend Lord Lea has said, where mutual back-scratching occurs. The process has given rise to a growing gap between executive salaries and average incomes of others in society. My noble friends Lord Lea and Lord Whitty have already covered that very adequately on Amendment No. 203. Nothing has been done about the scandal of directors being paid six times the pay of other people. The current Bill does not do anything about that either.
	My noble friend Lord Wedderburn suggested in 2004 that directors' remuneration committees should include employees' representatives. But he has now been persuaded that that is not necessarily the right way to proceed to get the debate going to encourage support for greater transparency and social responsibility on the issue. The amendment gives a wide discretion to the Secretary of State to nominate persons or organisations with whom the DRC should consult before proposing to the board of directors the directors' remuneration for the year.
	That would, for example, allow the Minister to nominate bodies interested in environmental issues, such as the Friends of the Earth, to intervene with questions about each director's record on such issues before the remuneration committee reached its decision on proposed remuneration. So, too, consultees could be proposed from among experts in social groups, such as unions and other bodies, to consult on the director's record on safety at work. It would be a mechanism through which various types of social representatives could raise other issues perhaps relating to the pay structure of the company except where such matters are already covered by collective bargaining.
	The amendment, however, is mild in its terms. It does not involve civil sanctions: it makes use of two mechanisms. First, the company must comply or explain. That is the chosen method of the City in respect of its combined code of good practice on corporate governance. It is difficult to see any objection to that. No legal remedies are attempted—only the pressure of social groups, the media and so on.
	Secondly, greater transparency on the so-called rent extraction by executives in their pay and benefits would be achieved, beyond the existing director's report and other required disclosure provisions, by way of the publications of the Secretary of State, where the company rejects consultation with the proposed social representatives. Provision could, of course, also be made for the publication of a report after consultation.
	I believe that the feeling behind the amendment is in full accord with the views of the Government and also that of the Conservative Party under its new leaders particularly as far as the environmental issues are concerned. Social and community issues are also important to all the major parties, as indicated in the discussions that we have already had throughout the consideration of this Bill. Here is a way of ensuring that these concerns are met, and continue to be met, by large companies which will actually have to engage with the issues.
	Large globalised companies arguably have more effect on the lives of us all than sometimes even governments. It therefore seems appropriate that there should be more accountability and more transparency. The aim of this amendment is to try to achieve those objectives. I beg to move.

Lord Judd: My Lords, I would like to put in a word of support for my noble friend Lady Turner. I, too, know how disappointed and frustrated our noble friend Lord Wedderburn is in not being able to participate in these deliberations. Indeed, it is difficult to think of deliberations of this kind without the presence of my noble friend Lord Wedderburn. Whatever one feels about his views, I am sure that all would put on record our admiration for his expertise and dedication to the importance of legislation in this sphere.
	In supporting my noble friend Lady Turner I would like to make just a couple of observations. First, I am one of those who believes that socially responsible capitalism has a dynamic and positive role to play in the future of humanity. I do not have an ideological position dismissing that possibility. I strongly believe that there is great potential there. I also recognise that both the Opposition and the Government frequently put forward their support for that principle, and they believe that a great deal of the social policy necessary for a healthy society—not only nationally, but internationally—can come from the way in which companies conduct themselves. I have always believed, however, that it is not good enough simply to wish the end; one must ensure that the means are there. It seems to me that the amendment is endeavouring to ensure that there is a proper consultation about the wider responsibilities of industry when remuneration is being fixed.
	As I argued on the previous amendment, if that is happening then there is nothing to be feared in an amendment of this kind. If it is not happening, then there is everything to be feared. It is quite clear that these arrangements are very important. Our noble friend Lord Wedderburn is simply helping the Government—and, indeed, the Opposition—to fill in the substance for making a success of the rhetoric they so frequently express about the possibility of meeting social responsibility through the behaviour of the private sector.
	I commend the amendment to the House. I hope that if the Minister is unable to accept it in this precise form, he will be able to say something to us suggesting that he may have practical proposals on Third Reading, according to what I know is his personal conviction, about how legislation that this House implements on these matters can be made a little firmer.

Lord Sainsbury of Turville: My Lords, as I said in responding to previous amendments, the Government strongly support the principle that companies should be sensitive to pay and employment conditions elsewhere in the group when taking decisions about directors' remuneration. However, this amendment would take us significantly further by involving persons from outside the company in the decision-making process. We do not believe that that is justified or desirable. The Government have consistently made it clear that directors' pay is a matter for companies and their shareholders under UK corporate governance structure. It is also for companies and their shareholders to decide on the nature and extent of any consultation with employees or their representatives.
	We very much share the genuine investor concern about the need for proper accountability, transparency and performance linkage on the issue of directors' pay. That is why the Government have taken significant action in this area. Perhaps I may briefly remind noble Lords of what has been achieved. In August 2002, the Government introduced the directors' remuneration report regulations. These require quoted companies to produce a detailed annual directors' remuneration report which is put to a shareholder vote at each annual general meeting. This gives the UK a comprehensive, transparent and accountable framework for directors' pay that compares very favourably with similar market economies. As I said in reply to my noble friends Lord Lea and Lord Whitty, we will be consulting about all reporting regulations, including those relating to the directors' remuneration report, at the end of this year as part of our implementation of the Bill.
	We have also consulted on the specific issue of "rewards for failure" in response to continuing investor concern about situations where directors leave companies that have performed poorly but receive excessive compensation packages when their contracts are terminated. The Government's response to that consultation included announcing the monitoring of compliance with the directors' remuneration report regulations.
	In January 2005, an independent report by Deloitte & Touche underlined the effectiveness of the Government's action in making directors' remuneration subject to closer scrutiny by shareholders. In particular, it demonstrated that companies are changing their remuneration policies and practices to reflect the link between pay and performance. That point is especially important. We want companies to act responsibly and to be sensitive to the wider scene, in particular pay and employment conditions elsewhere in the group, in determining directors' remuneration. We also want British companies to be able to offer the packages required to attract, retain and motivate people of the calibre and experience they need to make their companies successful. To quote Greenbury again, we believe that the key principles should be to link rewards to performance by both company and individual and to align the interests of directors and shareholders in promoting the company's progress.
	I believe the reforms that this Government have introduced will continue to be effective in ensuring that those principles lie at the heart of decision taking on directors' remuneration in this country. I do not think that the amendment, as drafted, would be helpful. I therefore ask my noble friend to withdraw it.

Baroness Turner of Camden: My Lords, I thank my noble friend for that detailed response to the amendment. I appreciate hearing from him yet again his commitment to the ideals that lie behind this amendment: the social obligations that he feels that companies should accept and so on. I am sorry that it has not been possible to accept the ideas behind our amendment because it seems to me, as my noble friend Lord Judd has said, that it presents a possible way of ensuring that the objectives that everyone seems to agree on are adequately met. The idea was to produce a mechanism that has not been considered before, as far as I am aware, whereby those objectives could possibly be met. It would also mean that there would be a continuous requirement for consultation with appropriate outside organisations with some concern and some responsibility for social issues. In view of what has been said, I shall beg leave to withdraw the amendment. I shall read with some pleasure what the Minister said about the commitment at least to the objectives lying behind the amendment.

Amendment, by leave, withdrawn.
	Clause 409 [Form and contents of summary financial statement: quoted companies]:

Lord Sainsbury of Turville: moved Amendments Nos. 204 to 211:
	Page 187, line 10, leave out "and operating and financial review"
	Page 187, line 13, leave out from "report" to end of line 14 and insert "or the directors' report"
	Page 187, line 19, leave out "or the operating and financial review"
	Page 187, line 20, leave out "or review"
	Page 187, line 22, leave out from "report" to end of line 23 and insert "or the directors' report"
	Page 187, line 28, leave out "or the operating and financial review"
	Page 187, line 29, leave out "or review"
	Page 187, line 47, leave out sub-paragraph (ii).
	On Question, amendments agreed to.
	Clause 411 [Quoted companies: annual accounts and reports to be made available on website]:

Baroness Noakes: moved Amendment No. 212:
	Page 188, line 20, leave out from first "the" to end of line 22 and insert "end of the fourth financial year of the company following the year to which the report and accounts apply"

Baroness Noakes: My Lords, in moving Amendment No. 212 I shall speak also to Amendment No. 213. These amendments were suggested to us by the UK Shareholders Association.
	The Government have, wisely in our view, introduced a requirement for quoted companies to publish certain information on their websites. The vast majority of companies already include their annual accounts and preliminary announcements on their websites. We do not believe that the requirements of Clauses 411 and 412 will cause difficulty for companies. I seek for that to be taken just a bit further in these two amendments. Amendment No. 212 requires five years of annual accounts rather than one, and Amendment No. 213 requires all other communications to shareholders—and, importantly, market announcements such as trading and interim statements, directors changes and so on—to be included on the website.
	When we debated the equivalent of Amendment No. 212 in Grand Committee I was genuinely surprised to hear the Minister say that the Government thought it was fine for shareholders to have to go to Companies House, which is expensive in itself for some, to pay a £3 search fee and doubtless also some photocopying fees. Asking for a company to keep information on its website rather than remove it is virtually cost free. The benefits are so self-evident that we can only suspect that the Government are seeking to protect the income of Companies House rather than thinking of the needs of shareholders and others.
	We see websites as providing a store of information for shareholders and others and not simply as a communication device for current information. We accept that websites are a powerful tool with which to communicate current information to shareholders, which is why we have sought to build on the Government's approach in Amendment No. 203 by adding some extra items which should be communicated more openly and rapidly to shareholders.
	The use of websites has transformed the potential for all shareholders, not just market professionals, to have access to significant volumes of data, both current and historical. It would be a great shame if we let the Bill go by without harnessing it to produce a bigger information revolution for shareholders than is currently envisaged by Clauses 411 and 412. I beg to move.

Lord McKenzie of Luton: My Lords, these two amendments would extend the requirements for quoted companies to carry information on their websites beyond the requirements of Clauses 411 and 412. Amendment No. 212 would extend the period for which quoted companies must retain their annual accounts and reports on their website from one to five years. While that is not an onerous requirement, we consider that the length of time it is appropriate to make historic accounts and reports publicly available should be a matter for the Financial Services Authority rules rather than for company law.
	The transparency obligations directive, which will be implemented next year into UK law, will require the annual accounts of some issuers—including most but not all quoted companies—to be made publicly available for at least five years. Therefore, we do not need to make separate provision in the Companies Act.
	The new clause proposed by Amendment No. 213 would significantly extend the amount of information a quoted company would be required to publish on a website. The Bill's new requirements in Clauses 411 and 412 for quoted companies to publish accounts and reports and preliminary results on their websites already focus on the most important financial information. The new clause would extend these requirements further to cover all communications to shareholders, prospectuses and announcements that a quoted company is obliged to make by market regulations. Again, I do not believe we should burden quoted companies with additional requirements that are properly matters for rules made by the Financial Services Authority under Part 6 of the Financial Services and Markets Act rather than for company law.
	On that basis, I hope the noble Baroness will feel able not to press these amendments.

Baroness Noakes: My Lords, the Minister will not be surprised to find that I am disappointed by his reply. I would like to make one point in response. He claimed that Clauses 411 and 412 already include the most important financial information. That is not true: they do not include trading updates, interim statements or profit warnings. These information requirements are seriously deficient in providing the most relevant financial information to companies.
	I will read carefully what the Minister said and consult further with the UK Shareholders Association, which I know feels strongly that further information should be made available. For today I shall beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendment No. 213 not moved.]
	Clause 413 [Requirements as to website availability]:

Lord McKenzie of Luton: moved Amendment No. 214:
	Page 189, line 22, leave out from "be" to end of line 23 and insert "—
	(a) conditional on the payment of a fee, or
	(b) otherwise restricted, except so far as necessary to comply with any enactment or regulatory requirement (in the United Kingdom or elsewhere)."

Lord McKenzie of Luton: My Lords, I shall speak also to Amendment No. 215. We accept that there may be problems with making corporate information available on a website. Primarily, companies could run the risk of penalties due to the differences in foreign jurisdictions and regulatory requirements on communications. I thank the noble Baroness, Lady Noakes, for raising the issue in Grand Committee and hope that she will be content not to move her amendment in the light of the government amendment, which achieves the effect that she seeks. I beg to move.

Baroness Noakes: My Lords, I thank the Government for considering the discussion that we had in Grand Committee and producing Amendment No. 214. I shall be delighted not to move Amendment No. 215 and to accept the government amendment.

On Question, amendment agreed to.
	[Amendment No. 215 not moved.]

Baroness Noakes: moved Amendment No. 216:
	Page 189, line 32, after "wholly" insert "or mainly"

Baroness Noakes: My Lords, Amendment No. 216 amends Clause 413(5)(b). The effect of that is that if information that should be on a company's website is unavailable, the criminal offence set out in Clause 412 will not apply if the failure is wholly or mainly attributable to circumstances that it would not be reasonable for the company to prevent or avoid. The clause excuses the directors only if the failure is wholly attributable to such circumstances.
	When we debated this in Grand Committee, the Minister said that the formula had been in use for more than five years since the Companies Act 1985 was amended and had caused no problems. Although it is true that the wording about electronic communication is in line with what is now Section 238 of the Companies Act 1985, that applies to a rather different situation, where members could elect to dispense with hard copy and access documents on the company's website. I do not know what take-up there has been of that provision, but I know that there is considerable shareholder resistance to relying on electronic communication alone. I suspect that the provision has hardly been used and it is therefore no surprise that no problems have emerged.
	We now have a new situation with Clause 412, which requires companies to place certain information on their websites and criminalises company officers if the information is not available. Although I do not much like the extensive use of criminal offences throughout company law, if they are to be used, we need to keep a sense of proportion. The clause will encourage risk-averse behaviour by companies and thereby impose regulatory costs that are unnecessary.
	Let me give the example of a terrorist attack, or, perhaps, a major fire in a fuel depot that knocks out the communications of the company's head office. The company's first priority is the safety of its staff; its second priority will be to ensure that its operating capacity is restored. Then it will move on to supply-chain issues, logistics, accounting integrity, systems availability, and so on. Some way down the line, the priority will shift to ensuring that the investor relations part of its website is back up and running. After day one, non-availability of the website is not wholly due to the attack or the fire; it is due to the company's list of priorities. Is it reasonable for the company to make that a low priority? Where on the priority list do the Government expect it to be?
	The Minister said that the Institute of Chartered Secretaries and Administrators has said that companies should give serious thought to setting up a backup facility for websites. What if the company's list of priorities leads to it having backup for its customer-facing website—for example, online ordering—but not the investor relations part, because of cost? What cost do the Government think it reasonable for companies to avoid?
	I hope that the Government will look at this again because, if they do not, I predict that the law of unintended consequences will spring up. Companies will be advised by their lawyers and company secretary that if they want to be sure to avoid criminal penalties—99.9 per cent of company directors care about not incurring criminal penalties—they must gold-plate their business arrangements. No more cost/benefit analysis; no more evaluation of risk; just failsafe provisions at whatever cost. I hope that the Government will agree with me that that would be an unfortunate outcome. I beg to move.

Lord McKenzie of Luton: My Lords, when we debated this amendment in Grand Committee, the noble Baroness raised concerns about how Clause 413(5) might operate. She asked whether the effect of the clause will be that companies will be expected to have elaborate business continuity arrangements to cover website availability in the event of major events such as fire or terrorist attack. Specifically, she asked what would be reasonable as regards prevention or avoidance. I shall try to address those concerns in my reply. She has reiterated some of those points in moving the amendment today.
	A company wishing to take advantage of paragraph (5)(b) must show that its failure to make information available on its website is wholly attributable to circumstances that it would not be reasonable to expect the company to expect or avoid. The examples given in Committee and again today are of major events such as fire or terrorist attack. They are clear examples of such circumstances. It was feared that the clause might require companies to operate on a risk-averse basis, employing elaborate business continuity arrangements that cover website availability. I must say that it would be a very risk-averse company that feared prosecution under Clauses 411 and 412 in circumstances such as the noble Baroness described.
	I should have thought that in those circumstances the failure would be wholly attributable to circumstances that it would not be reasonable for the company to have addressed and avoided. Of course, there could be cases where there were questions whether the failure was completely beyond the company's reasonable control, which might be less clear-cut. However, even here, a company is unlikely to be at risk of prosecution provided that it takes action in the event of a website failure.
	The effect of subsection (5) is not onerous as it requires the company only to take reasonable means to ensure that the information is available on the website. I emphasise that it is not obliged to place its reports, accounts or preliminary results on its own website in the event of a website failure. It can make the information available on another website that is maintained on its behalf. I do not think that that can be described as an elaborate business continuity arrangement.
	As the noble Baroness, Lady Noakes, rightly said in Committee, we can expect rapid growing use of websites and electronic communication. Such forms of communication are increasingly important. It is quite reasonable to expect companies to arrange a form of backup facility for their websites to avoid problems when websites go down. I reiterate the point that the Institute of Chartered Secretaries and Administrators' best practice guide on electronic communication with shareholders recommends that as a matter of best practice. For all the above reasons, I regret to say that I am not persuaded of the need for the amendment. However, I will, as ever, reflect on what the noble Baroness said and read Hansard with interest.

Baroness Noakes: My Lords, I am very glad that the Minister said that final sentence, because I shall now modify the tone of my closing remarks. I ask him to look again at the examples that I gave. It is not a question of whether the company could set up business continuity arrangements; it is a question of how it prioritises when major events occur. If the Minister has ever seen business continuity plans, which are usually very extensive, he will know that they carry cost—sometimes very significant cost, especially when they relate to backup IT facilities. There is no doubt about that. I am just asking the Government to reflect on whether they insist on gold-plating this requirement. However, I was pleased to hear what the Minister said at the end and I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 414 [Right of member or debenture holder to copies of accounts and reports: unquoted companies]:

Baroness Noakes: moved Amendment No. 217:
	Page 189, line 42, at end insert—
	"( ) A demand for the purposes of this section must be made in writing and may be delivered to the company by any generally available method, including electronic methods."

Baroness Noakes: My Lords, in moving Amendment No. 217, which would amend Clause 414, I speak also to Amendment No. 220, which is identical and would amend Clause 415.
	The clauses concern the rights of members and debenture holders to demand copies of the accounts of quoted and unquoted companies respectively. The amendments would clarify that a request must be in writing. When we debated these amendments in Committee, the Minister said that there should be no reason why a simple telephone request should not be allowed for such requests for documents. That seems entirely reasonable in today's world of modern telecommunications, until one marries that informality—this is like so much of the Bill—with the fact that the company's requirement to send copies of its accounts and reports is accompanied by its very own criminal offence.
	The clauses also, of course, impose costs on companies, especially smaller ones that do not have large print-runs of their accounts to keep in stock. That is why I continue to believe that, in the interests of clarity between members and the company, it would be right for there to be some formality in the request if non-compliance with the request will trigger a criminal prosecution. If this is not the case, it will, in effect, impose on companies a requirement to introduce telephone call-monitoring systems. That might be appropriate for the largest companies, but I do not believe that it would be appropriate for the hundreds of thousands of smaller companies which also fall within the clauses. I beg to move.

Lord McKenzie of Luton: My Lords, shareholders or debenture holders in unquoted and quoted companies are entitled to request without charge a copy of the company's latest annual accounts and reports. The amendments would require shareholders or debenture holders to make these requests in writing, whereas Section 239 of the Companies Act 1985 allows them to make the request in any form. I maintain that this unreasonably discriminates against the person wanting to make the request who does not have access to the internet to e-mail the request. Instead of being able to speak to someone on the telephone, the person would be subject to delay in sending and receiving the request by post.
	The noble Baroness, Lady Noakes, has said that the amendments, which were tabled first in Committee, were suggested by corporate lawyers in the City. I have to say that I am surprised to hear them argue that companies are running a serious risk of non-compliance when they deal with a matter as straightforward as a request on the telephone for a set of the accounts. If they cannot manage this, it is surprising that any mail-order business has ever got off the ground. Companies have been perfectly able to deal with simple telephone requests under existing law. Complaints under the current legislation—Section 239 of the Companies Act 1985—are rare and tend to arise because the company was unaware that it had any obligations to provide a copy of its accounts.
	Companies House tells us that, in its experience, a company usually complies once it realises that it has this obligation. Indeed, Companies House is unaware of any cases referred for legal action in the past where a company has not complied with a demand. I therefore hope I have succeeded in persuading the noble Baroness that companies should have no major problems in fulfilling their legal obligations to respond within the given timeframe—problems that would warrant introducing this new requirement. I accept that systems must be introduced, but those could be quite low-level to cater for these situations.

Baroness Noakes: My Lords, I thank the Minister for that reply, which, as usual, argues for more burdens on business by introducing systems for this and that. I put it to him that telephone call-monitoring systems are not particularly easy or cheap to introduce, but I will consider what he has said with those who suggested to us that the lack of clarity in the clause should be remedied, given that we have an opportunity to remedy it. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 415 [Right of member or debenture holder to copies of accounts and reports: quoted companies]:

Lord Sainsbury of Turville: moved Amendments Nos. 218 and 219:
	Page 190, line 19, leave out paragraph (d).
	Page 190, line 21, leave out from "and" to end of line 22 and insert "on the directors' report"
	On Question, amendments agreed to.
	[Amendment No. 220 not moved.]
	Clause 416 [Name of signatory to be stated in published copies of accounts and reports]:

Lord Sainsbury of Turville: moved Amendment No. 221:
	Page 191, line 3, leave out paragraph (d).
	On Question, amendment agreed to.
	Clause 425 [Period allowed for filing accounts]:
	[Amendment No. 222 not moved.]
	Clause 427 [Filing obligations of companies subject to small companies regime]:

Lord Hodgson of Astley Abbotts: moved Amendment No. 223:
	Page 196, line 22, leave out second "accountant's" and insert "independent examiner's"

Lord Hodgson of Astley Abbotts: My Lords, in moving Amendment No. 223, I also speak to Amendments Nos. 238, 295 to 300, 492 and 507, which concern Clauses 427, 437, 467, 468, 769 and Schedule 9.
	We return to an issue that we discussed in Grand Committee on 7 March. I was very disappointed then, which is putting it mildly, at the Minister's initial response. He said:
	"Whenever we change the conditions for the audit exemption, we believe that it is important to have a public consultation to allow any interested parties to argue the case for the existing regime. In this case too, we would prefer to consider this change in the normal way. We will consider the merits of the proposal further, with a view to consultation if appropriate. If the results of consultation were to justify it, we would be pleased to make the appropriate deregulatory changes to the legislation"—[Official Report, 7/3/06; col. GC283.]
	As I said then, to talk about the need for more consultation after an eight-year gestation period is candidly absurd. The Minister was kind enough to be slightly more conciliatory in his closing remarks when he said:
	"I have tried to acknowledge the issues that he has raised. If it will help, I will say more definitively that we will certainly consider this in more detail so that we may be able to respond in a way which helps him by Report; I understand that he is passionate about this. We will try to meet that in due course".—[Official Report, 7/3/06; col. GC284.]
	That was a kind and generous offer. Now I see on the Marshalled List two groups of government amendments, led by Amendments Nos. 282 and 290 respectively, which, as I read it, are the Government's considered response.
	I look forward to hearing from the Minister in due course but, in the mean time, we have retabled our amendments. I think that, on the last occasion, tabling one large group of amendments did not give enough focus to our discussions. We did that then because we imagined—how wrong we were—that what we were proposing was totally uncontroversial. So now we have split the group into two; the position of independent charity examiners, and the audit thresholds. This group deals with the position of independent charity examiners.
	The amendments seek recognition of the specialist position of independent charity examiners in relation to the accounts of charities. We have here a clear opportunity to bring the Bill into line with the Charities Bill, which has already passed through your Lordships' House and is now in another place. Independent charity examiners fulfil the audit requirements of charities whereby, below a certain asset and turnover threshold, they are eligible for an independent examination of their accounts rather than the more costly accountant's report.
	The noble Lord, Lord Phillips of Sudbury, speaking for the Liberal Democrats, the noble Lord, Lord Bassam of Brighton, speaking for the Government, and the Opposition discussed the merits of this regime in depth during the passage of the Charities Bill, and for several hours in Committee, and the Government came to the conclusion that a change was desirable. Indeed, the Government introduced amendments to this effect. It is therefore extremely frustrating to see now that the Bill does not match up to its counterpart and give the required recognition to independent examiners. It will therefore bar charities, at least for the time being, from using a specialist body that was created to fulfil exactly this purpose and that has been checked out and verified by the Minister's colleagues in the Home Office. I am sure the noble Lord, Lord Bassam of Brighton, will be happy to confirm this.
	A charity is not like a commercial company. Its approach and objectives are quite different. Its supporters need different information from that required by shareholders in a commercial enterprise. This is recognised by the Charity Commission and the accounting profession, in that there is a special charities statement of recommended practice. After all this work, including the creation of a recognised professional association, the Association of Charity Independent Examiners, to control the development of the profession and to set professional standards and so forth, the Minister wants more consultation. I respectfully suggest that this would be superfluous. We have, as I said, already had eight years of a general consultation on the Bill, and much debate on this point during the passage of the Charities Bill. As the Minister said himself in Grand Committee on 7 March:
	"Discussion of charities law is the right context in which to consider those thresholds".—[Official Report, 7/3/06; col. GC282.]
	So, we have already discussed this issue in a charity forum, and the Government have decided that now is the time to link the Bill to the results of that debate. The amendments would allow small charities, for which provision is made in the Charities Bill for independent examination instead of an accountant's report, to have the same eligibility in this Bill, thus avoiding the confusion and expense of overlapping authorities in this important area.
	Finally, when the Minister comes to reply, I hope that he will not rely on government Amendment No. 282. Please let us have not yet another general power which may or may not ever be used. Today is the day for joined-up government between the Home Office, on the one hand, for the charities and the DTI, on the other hand. This is a day for action. I beg to move.

Lord Sharman: My Lords, the names of my noble friend Lord Razzall and myself are on all the amendments in this group. I shall be brief. The noble Lord, Lord Hodgson, has explained graphically and enthusiastically the rationale behind these amendments. From these Benches, we support them also.

Lord McKenzie of Luton: My Lords, I am conscious that I disappointed the noble Lord, Lord Hodgson, in Grand Committee. I hope that I will not disappoint him so much on this occasion, although I am not sure that he will be happy with the totality of what I have to say. We have considered carefully the raft of amendments that the noble Lord brought forward in Grand Committee on the audit of charities. On some, we have brought forward amendments at this stage, but that should not be seen as our total response to the points that the noble Lord has raised. We have already debated the amendments that make the Bill refer to the Charity Commission, not the Charity Commissioners, consistent with the Charities Bill. In Part 16, we have amendments to bring the thresholds applying to charitable companies into line with those for charitable companies in the Charities Bill.
	The amendments to which the noble Lord has spoken go much further, together with the degrouped list which we will discuss subsequently, and would move in the direction of subjecting small charitable companies to the same rules on scrutiny of financial accounts as unincorporated charities are subject to under the Charities Acts. Overall, we have sympathy with that proposal and are willing to consider it. However, we need to consider it carefully, taking into account the interests and views of the charities and those who contribute to and work with charities.
	If we conclude that it is right that small charitable companies should be subject to a charity law audit regime rather than a company law one, it would probably be best to remove small charitable companies from the audit rules in company law altogether. That way charity law would determine the appropriate regime for audit of all charities, whether companies or not. I think that that is a point on which the noble Lord would agree.
	We agree that it would be clearer for charities if we were able to apply a single set of rules set out in charity law to all small charities for purposes of audit, but we are not in a position yet to amend the Bill in the way proposed. We have, however, following Grand Committee, discussed this with the Home Office and others. There will be a consultation with a view to our bringing forward appropriate amendments, probably in another place, if this is the outcome of the consultation.
	In summary, I agree to consider these amendments. We are minded to remove the special rules for scrutiny of the financial accounts of small charitable companies from company law and there will be a brief consultation on that. I hope that the noble Lord will see that as at least half a loaf and that our earnest intention is to move down the path which he would support and accept.

Lord Hodgson of Astley Abbotts: My Lords, as I said to the noble Lord, Lord Sainsbury, at an earlier stage, "Fine words butter no parsnips". I am grateful to the noble Lord, Lord Sharman, for his support. The Government talk about the changes that they have made to bring this Bill into line with the Charities Bill. To say, "Well, we changed the words Charity Commissioners to Charity Commission" is what I might call a small change.

Lord McKenzie of Luton: My Lords, I just itemised that, along with a couple of other amendments before us today, as something which is on account. But I thought that I had made clear the substance of what we want to achieve.

Lord Hodgson of Astley Abbotts: My Lords, we then have to consult the charities. Perhaps I may say that we sat through eight days in Grand Committee on the Charities Bill and there was an enormous amount of consultation. There is really nothing more to be said about this. To have a consultation and then to say, "We might bring something in if this is the outcome in another place" I am afraid is not good enough. I wish to test the opinion of the House.

On Question, Whether the said amendment (No. 223) shall be agreed to?
	Their Lordships divided: Contents, 142; Not-Contents, 120.

Resolved in the affirmative, and amendment agreed to accordingly.

Lord McKenzie of Luton: moved Amendment No. 224:
	Page 197, line 3, at end insert—
	"( ) The copy of the auditor's report delivered to the registrar under this section must—
	(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or
	(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."

Lord McKenzie of Luton: My Lords, I beg to move Amendment No. 224 and speak to Amendments Nos. 225, 226, 230, 231, 236, 327 and 328. These are technical amendments to ensure that the rules on inclusion of auditors' names in published audit reports also apply to the copies of audit reports that are filed at Companies House. For companies subject to the small companies regime, Amendment No. 224 inserts an obligation to include the auditor's name and the senior statutory auditor if the auditor is not an individual, in the copy of the audit report filed with the registrar. This largely restates the requirement in the Companies Act 1985.
	Amendments Nos. 225, 226 and 230 do the same thing for companies that are respectively medium-sized, unquoted and quoted. Amendment No. 231 is simply consequential.
	Amendments Nos. 327 and 328 replace Clause 497 with two new clauses. The first restates the obligation currently in Clause 497 to include the auditors' names in published copies of audit reports. The second restates the exception where there is a risk of violence or intimidation but now applies both to published and to filed copies of the audit report. I beg to move.

On Question, amendment agreed to.
	Clause 428 [Filing obligations of medium-sized companies]:

Lord McKenzie of Luton: moved Amendment No. 225:
	Page 197, line 27, at end insert—
	"( ) The copy of the auditor's report delivered to the registrar under this section must—
	(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or
	(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."
	On Question, amendment agreed to.
	Clause 429 [Filing obligations of unquoted companies]:

Lord McKenzie of Luton: moved Amendment No. 226:
	Page 197, line 39, at end insert—
	"( ) The copy of the auditor's report delivered to the registrar under this section must—
	(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or
	(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."
	On Question, amendment agreed to.
	Clause 430 [Filing obligations of quoted companies]:

Lord McKenzie of Luton: moved Amendments Nos. 227 to 230:
	Page 198, line 7, leave out paragraph (d).
	Page 198, line 9, leave out from first "report" to end of line 10 and insert "and the directors' report"
	Page 198, line 11, leave out from "report" to "delivered" in line 12 and insert "and the directors' report"
	Page 198, line 14, at end insert—
	"( ) The copy of the auditor's report delivered to the registrar under this section must—
	(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or
	(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section."
	On Question, amendments agreed to.
	Clause 432 [Special auditor's report where abbreviated accounts delivered]:

Lord McKenzie of Luton: moved Amendment No. 231:
	Page 199, line 32, leave out "to 497 (signature of auditor's report)" and insert ", 496, (Names to be stated in published copies of auditor's report), and (Circumstances in which names may be omitted) (signature of auditor's report etc)"
	On Question, amendment agreed to.
	Clause 437 [Voluntary revision of accounts etc]:

Lord McKenzie of Luton: moved Amendments Nos. 232 to 237:
	Page 201, line 26, leave out from first "report" to "or" in line 27 and insert "or the directors' report"
	Page 201, line 31, leave out ", review"
	Page 201, line 32, leave out ", report or review" and insert "or report"
	Page 201, line 35, leave out ", report or review" and insert "or report"
	Page 202, line 1, leave out from first "report" to "or" in line 2 and insert "or directors' report,"
	Page 202, line 6, leave out ", review"
	On Question, amendments agreed to.

Baroness Noakes: moved Amendment No. 238:
	Page 202, line 9, leave out "reporting accountant" and insert "independent examiner"
	On Question, amendment agreed to.

Lord McKenzie of Luton: moved Amendments Nos. 239 to 241:
	Page 202, line 10, leave out ", review"
	Page 202, line 12, leave out ", report or review" and insert "or report"
	Page 202, line 17, leave out ", report or review" and insert "or report"
	On Question, amendments agreed to.
	Clause 438 [Secretary of State's notice in respect of accounts or reports]:

Lord McKenzie of Luton: moved Amendments Nos. 242 to 251:
	Page 202, line 26, leave out from "accounts" to "have" in line 27 and insert "or directors' report"
	Page 202, line 28, leave out from "accounts" to "has" in line 29 and insert "or directors' report"
	Page 202, line 32, leave out ", report or review" and insert "or report"
	Page 202, line 38, leave out ", report or review" and insert "or report"
	Page 202, line 39, leave out "or review"
	Page 202, line 43, leave out ", report or review" and insert "or report"
	Page 202, line 44, leave out ", report or review" and insert "or report"
	Page 203, line 2, leave out from "accounts" to ", in" in line 3 and insert "and revised directors' reports"
	Page 203, line 4, leave out ", reports or reviews" and insert "or reports"
	Page 203, line 5, leave out ", reports or reviews" and insert "or reports"
	On Question, amendments agreed to.
	Clause 439 [Application to court in respect of defective accounts or reports]:

Lord McKenzie of Luton: moved Amendments Nos. 252 to 266:
	Page 203, line 13, leave out "or operating and financial review"
	Page 203, line 16, leave out "or review"
	Page 203, line 29, leave out from "report" to "it" in line 30.
	Page 203, line 31, leave out "directors' report or operating and financial review" and insert "report"
	Page 203, line 33, leave out from "any" to "summary" in line 34.
	Page 203, line 36, leave out "or review"
	Page 203, line 38, leave out ", report or review" and insert "or report"
	Page 203, line 45, leave out "or review"
	Page 204, line 2, leave out ", report or review" and insert "or report"
	Page 204, line 4, leave out ", report or review" and insert "or report"
	Page 204, line 8, leave out ", report or review" and insert "or report"
	Page 204, line 9, leave out ", report or review" and insert "or report"
	Page 204, line 17, leave out from "accounts" to ", in" in line 18 and insert "and revised directors' reports"
	Page 204, line 19, leave out ", reports or reviews" and insert "or reports"
	Page 204, line 20, leave out ", reports or reviews" and insert "or reports"
	On Question, amendments agreed to.
	Clause 440 [Other persons authorised to apply to the court]:

Lord McKenzie of Luton: moved Amendments Nos. 267 and 268:
	Page 204, line 27, leave out "directors' reports and operating and financial reviews" and insert "and directors' reports"
	Page 204, line 29, leave out "directors' reports and operating and financial reviews" and insert "and directors' reports"
	On Question, amendments agreed to.
	Clause 441 [Disclosure of information by tax authorities]:

Lord McKenzie of Luton: moved Amendment No. 269:
	Page 205, line 41, leave out "three" and insert "six"

Lord McKenzie of Luton: My Lords, Clause 441 concerns disclosure of information by the tax authorities. This amendment increases the term of imprisonment from three months to six months for a person convicted on summary conviction in Scotland or Northern Ireland of an offence of unlawful further disclosure. This is to bring it into line with other offences. I beg to move.

On Question, amendment agreed to.
	Clause 442 [Power of authorised person to require documents, information and explanations]:

Lord McKenzie of Luton: moved Amendment No. 270:
	Page 206, line 6, leave out "directors' report or operating and financial review" and insert "or directors' report"
	On Question, amendment agreed to.
	Clause 443 [Restrictions on disclosure of information obtained under compulsory powers]:

Baroness Noakes: moved Amendment No. 271:
	Page 206, line 37, leave out "private"

Baroness Noakes: My Lords, here we come to the first of a series of amendments to chapter 12 of Part 15 and to chapter 1 of Part 22. These amendments concern the use of confidential information and in general seek to establish that proper restraints are in place on the use of confidential information. There is a balance to be struck between the needs of effective government on behalf of citizens as a whole and the rights of individuals and businesses, and I do not pretend that getting it right is easy. But the role of your Lordships' House is to challenge legislation when it takes rights away—in this case, the right to have confidential information kept that way.
	With those introductory remarks, I turn to Amendment No. 271, which would delete the word "private" from Clause 443(1). The clause relates to information obtained by the Financial Reporting Review Panel and provides restrictions on what may be done with information relating to the private affairs of an individual. Clause 630 is in similar form, but applies to the Takeover Panel; Amendment No. 450 seeks to delete the word "private" from that clause. These are probing amendments.
	So far as I can ascertain, no definition of the word "private" is given in the Bill, and it is important to be precise about it because private information is protected in some measure by Clause 443, but non-private information is not. I invite the Minister to tell us what private information means for these two clauses, and I hope that he will give examples of information that is both private and non-private. I beg to move.

Lord McKenzie of Luton: My Lords, as the noble Baroness has said, this is the first of a number of amendments relating to the restrictions on forward disclosure of information obtained by the Financial Reporting Review Panel under its statutory powers. A parallel amendment relates to Part 22 and information held by the Takeover Panel. Before addressing the particular amendments tabled by the Opposition, it might be helpful if I made a general point about the FRRP's operations. The panel's operating procedures require it to treat all information received from companies as if it had been received following the exercise of its statutory power. The panel would want to rely on its statutory power to require information only in the rare circumstances where a request for information to be provided voluntarily was not met.
	Clause 443 concerns restrictions on the disclosure of information obtained under the panel's compulsory powers. It allows for onward disclosure to be made through gateways specified in Clause 444, but otherwise makes onward disclosure of information about the "private" affairs of an individual or about any particular business subject to the consent of the individual or business concerned unless the information is available to the public from another source. Amendment No. 271 would extend the restriction on the forward disclosure of information relating to the private affairs of an individual to include information about that individual's business affairs. However, the business affairs of the individual are already subject to the restriction in subsection (1) because it covers information relating to a business. This would include any business, whether it is a company, a partnership or run by an individual as a sole proprietor. We do not, therefore, see the need for the amendment. Furthermore, if the amendment were accepted, in cases where information related to the business affairs of both the individual and the business, separate consent would be required. That seems unnecessary. It should be for the individual to exercise consent where the information relates to his private affairs. Similarly, it should be for the business to consider the necessary consent where the information relates to the business.
	There are some differences between the gateways provisions as they apply in relation to the Takeover Panel. For instance, those provisions apply irrespective of whether the panel obtained the information under its compulsory powers or otherwise. Nevertheless, I consider that the arguments rehearsed above apply equally in relation to the effect on Clause 630 of the parallel amendment proposed to the disclosure provisions concerning the panel.
	Specifically in response to the question put by the noble Baroness on what the term "private affairs" means, in this context I think that it means non-business matters. As she says, we do not have a specific definition, but an example of what perhaps might be private in this context would be matters under inquiry such as information relating to an individual's remuneration, share options or related party transactions which fall to be disclosed within accounts in accordance with reporting standards. That could be information which came before the Financial Reporting Review Panel. So I think that the distinction between private and business is that private matters are those which are non-business. I hope that that deals with the point made by the noble Baroness. If not, she may wish to look at the record. Obviously, I shall do so as well, and will follow up this response in writing if I have not dealt with it in sufficient detail.

Baroness Noakes: My Lords, I thank the Minister for his response and I am grateful for the illumination, which I had not fully appreciated, that the provisions relating to the FRRP apply only to information that it obtains compulsorily; I shall reflect on that. However, I believe that the word "private" is used elsewhere in clauses dealing with information going through gateways and that it is a general problem because it has not been defined. I am not sure whether the Minister's answer is necessarily correct—not that I seek to suggest that he has given the wrong answer with any deliberate intent. I shall certainly consider his reply with my advisers and I hope that he, too, will look at this again. It is important that there should be a general understanding, because we are talking about the rights of individuals. For today, however, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 444 [Permitted disclosure of information obtained under compulsory powers]:

Baroness Noakes: moved Amendment No. 272:
	Page 207, line 23, leave out "following exceptions" and insert "provisions of this section"

Baroness Noakes: My Lords, in moving Amendment No. 272, I shall speak also to the amendments grouped with it. Amendments Nos. 272 and 273 amend Clause 444, which deals with the permitted disclosure of information obtained by the FRRP under its compulsory powers—as we have just heard—while Amendment No. 451 amends Clause 630, which deals with the Takeover Panel. The scheme of disclosure adopted in this Bill is first to empower an organisation, the FRRP or the Takeover Panel, to get information; to create an offence of disclosing it unless permitted to do so; and then to set out what is permitted. We have no particular problem with that. Our concerns arise over the way in which individual disclosures then take place.
	Clause 444 allows the disclosure of information obtained by the FRRP for a wide number of purposes to a wide number of persons. I shall come to that aspect in a later group of amendments. Schedule 1, together with Clause 630, does the same for the Takeover Panel. What none of these parts of the Bill does is set out whether any controls exist on the disclosure of information by individuals working in the FRRP or the Takeover Panel. The Bill says nothing about who within those organisations may authorise the release of confidential information or whether any controls have to be in place within the organisations.
	I contrast that with a formulation found in other legislation dealing with the release of confidential information. For example, the Commissioners for Revenue and Customs Act, passed last year, is in a rather different form. Apart from a disclosure for HMRC purposes or for certain criminal purposes, information may be disclosed to various persons only if it is made on the instructions of the commissioners and if they believe that it is in the public interest. That is set out in Sections 17 to 21 of the Act. I have taken the essence of that Act—authorisation by the commissioners in the public interest—and applied it to the permitted disclosures made by the FRRP as set out in Clause 444. That would be the effect of Amendments Nos. 272 and 273. For the Takeover Panel, I have included authorisation only in Amendment No. 451, but I want to reserve my position as to whether the public interest ought also to be included as a prerequisite test when the panel is involved.
	I shall listen carefully to what the Minister says about the public interest test, in particular why there is one for HMRC but none in this legislation for the FRRP or the Takeover Panel. I shall also listen carefully to what the Minister says about why there was a need for the commissioners to issue instructions in the case of their legislation, but no equivalent procedure, authorisation or instructions in this Bill.
	I want to make it plain that Members on these Benches do not wish to restrict the use of information when there is a genuine public interest case for it. What we seek to ensure is that proper safeguards are in place within the organisations before information, which prima facie should be regarded as confidential to the individuals or the businesses concerned, is allowed to be passed on for other purposes. I have confidence in the individuals who serve on the FRRP and the Takeover Panel and I think that they would be proper guardians of the balance between the public interest and the rights of the individual, which is why we have drafted the amendments as we have. I beg to move.

Lord Sharman: My Lords, I support these amendments. The noble Baroness, Lady Noakes, has spoken eloquently about the need for balance, and, again, that is what the issue is about. We have spoken on many occasions in these debates, both in Committee and on Report, about how the Bill must strive to get the right balance between the public interest and the rights of the individual. I should not like to see us heading down the route where, for example—as happens in a certain place on the other side of the Atlantic—you can be absolutely confident that if information is required by one agency it will flow, almost as a matter of course, around the agency circuit without any control at all. It is important that we strike the right balance, and for that reason I support the amendments.

Lord McKenzie of Luton: My Lords, currently the Financial Reporting Review Panel may disclose information obtained under its compulsory powers only in a limited range of circumstances. It may make disclosures to the bodies listed in subsection (3) and for the purposes listed in subsection (4), as well as, in circumstances specified in subsections (5) and (6), to public bodies outside the UK. The new subsection introduced by Amendment No. 273 would impose additional requirements on the panel that would involve it expending considerably more resources in order to meet the higher thresholds that the amendment proposes. First, it would have to authorise each and every onward disclosure of information by the body to which it had previously disclosed that information; and, secondly, it would have to be satisfied that it would be in the public interest to make the onward disclosure.
	But what is the logical reason for asking the panel to judge whether or not, say, the Financial Services Authority should be making an onward disclosure to the Secretary of State for Trade and Industry in the public interest? Moreover, the regulators exercising these functions may not have a reciprocal gateway with the panel, which would then be precluded from considering the very information that it would need to have in order to determine whether or not disclosure could be in the public interest in the particular circumstances. Such decisions should properly be for the bodies concerned, which are in the best position to have regard to all relevant factors in determining whether onward disclosure would be appropriate.
	Similar considerations of resources and regulatory authority and practice apply to Amendment No. 451, which would apply where the Takeover Panel disclosed information to another person or body under the relevant gateways provided for by Clause 630. It would require the panel to authorise any onward disclosure of such information by that person or body. For the authorisation process to be meaningful, the panel would need to consider the merits of any such onward disclosure. The amendment would therefore impose additional burdens on the panel.
	Moreover, the panel might not be best placed to make a decision as to whether, for instance, the Treasury should make a disclosure to the Director of Public Prosecutions. As in the case of the Financial Reporting Review Panel, the Takeover Panel might not even be in possession of all the necessary information on which to base such a decision. This might depend, for instance, on the contents of documents which were not available to the panel and, unless reciprocal gateways were in place, could not be supplied to the panel. It does not seem to us that there is an overriding public interest justification in requiring either the FRRP or the Takeover Panel to authorise further disclosures that would outweigh these obstacles.
	I emphasise that in the case of both the FRRP and the Takeover Panel there are already restrictions on the onward disclosure of information by the bodies to which they have previously disclosed that information. In the case of the FRRP, those bodies may only disclose this information further, except to each other, for the purposes set out in subsection (4). As for the Takeover Panel, with the exception of information supplied to other EEA regulators in accordance with the requirements of the takeovers directive, the disclosure restrictions that apply to the panel will continue to apply to the recipient of information from the panel. So the information could be further disclosed only in accordance with the provisions of Clause 630. The criminal sanction at Clause 631 will also apply to unlawful disclosure of such information by any person to whom it is passed by the panel. I think that the noble Baroness will see that we are not able to support the amendments she has tabled.
	The noble Baroness asked about the commissioners of the Inland Revenue. There has always been a higher control of Revenue information. Individuals dealing with the Revenue have to be completely open about their private affairs. In contrast, in dealing with the FRRP or the Takeover Panel when they are under investigation—or at least potentially under investigation—the range of information is much less. We are not saying that their rights have to be disregarded, but the circumstances are different. The specific circumstances in which information would come before the FRRP and the Takeover Panel are different from those in which information would come to the Revenue. I have perhaps not put it very succinctly, but that is the thrust of why there is a difference. I hope that the noble Baroness will understand why the amendments she has tabled—unless, perhaps, they are probing in nature—would create great difficulties and would be impractical.

Baroness Noakes: My Lords, I am extremely disappointed with the Minister's response. He referred to burdens on the FRRP and on the Takeover Panel—but we are talking about protecting the confidentiality of information. It may be that these bodies have obtained the information because the organisations or individuals are under investigation in some way, but that does not authorise onward circulation of that information. We are very clear about this. I do not believe that the HMRC Act is completely sui generis; it is there for the purpose of putting in controls. Indeed, we debated those controls very extensively during the passage of that Act, which I had the privilege of taking through with the noble and learned Lord the Attorney-General only last year. I am not satisfied with the Minister's response. I beg leave to test the opinion of the House.

On Question, Whether the said amendment (No. 272) shall be agreed to?
	Their Lordships divided: Contents, 123; Not-Contents, 117.

Resolved in the affirmative, and amendment agreed to accordingly.

Baroness Noakes: moved Amendment No. 273:
	Page 207, line 24, at end insert—
	"( ) It does not apply to the disclosure of information which has been—
	(a) authorised by the person authorised under section 440;
	(b) satisfies one or more of subsections (3) to (6) of this section; and
	(c) is considered by the person authorised under section 440 to be in the public interest."
	On Question, amendment agreed to.

Baroness Noakes: moved Amendment No. 274:
	Page 207, line 27, leave out subsection (3).

Baroness Noakes: My Lords, in moving Amendment No. 274, I shall speak to the other amendments in the group as well. As with the previous groups, I shall be dealing with similar issues that arise in connection with the FRRP in Part 15 and the Takeover Panel in Part 22.
	The scheme of disclosure for both bodies is that disclosure may be made to specified bodies or for specified purposes. In Clause 444, information may be disclosed to six named bodies under subsection (3) or for a much larger number of specified purposes, some of which overlap, set out in subsection (4).
	In Part 22, Clause 630(3) allows disclosure to the 12 persons listed in Part 1 of Schedule 2 or for the 70 specified purposes in Part 2 of that schedule. Amendment No. 274 would delete subsection (3) of Clause 444 so that disclosure of the FRRP's information must be for a specified purpose, as set out in subsection (4). It seems to us that the persons listed in subsection (3) are adequately covered by subsection (4) and that no diminution of disclosure would be involved.
	Amendment No. 454 is very similar in that it would amend Clause 630 so that disclosure of Takeover Panel information may be made only for the listed purposes set out in Part 2 of Schedule 2 and not to the persons listed in Part 1. Amendment No. 453 is a further possible approach which would require the disclosure to be made to one of the 12 persons only if it satisfied one of the 70 specified purposes. We will not be moving Amendment No. 452.
	The Minister will note that the disclosure route adopted by Amendments Nos. 274 and 454 are not intended to be unduly restrictive since they give way to the longer lists of permitted disclosures in either case. Will the noble Lord explain why the Government feel they need disclosure by person and by purpose because we cannot see any value in the current drafting? Indeed, we are concerned that any disclosure of confidential information could be made to the specified persons regardless of whether that disclosure relates to the appropriate functions of those persons.
	Will the Minister also comment on the different approaches taken to disclosure by the FRRP and the Takeover Panel or, rather, this Bill in relation to the FRRP and the Takeover Panel? It is evident that a different drafting hand is at work, but the differences go beyond language and structure of clauses. It appears that the Takeover Panel has far greater disclosure opportunities than the FRRP. Let me take one example: item 60 in Part 2 of Schedule 2 allows disclosure by the Takeover Panel,
	"with a view to the institution of, or otherwise for the purposes of, criminal proceedings".
	We think that that is rather important, and a good reason for the disclosure of information, but we cannot see why the FRRP cannot do so. Will the Minister explain that?
	We debated the disclosure gateways in Grand Committee, but we have not yet heard a coherent account of the way in which they should operate. We do not understand the overlap between persons and purposes; we do not understand why different approaches apply in different parts of the Bill. We are fairly sure that the Bill needs to be amended. This group of amendments provides some possibilities, though I am sure that there are others. I beg to move.

Lord McKenzie of Luton: My Lords, the Financial Reporting Review Panel—we touched on this previously—may disclose information obtained under its compulsory powers only in a limited range of circumstances. It may make disclosures to the bodies listed in subsection (3) and for the purposes listed in subsection (4), and, in circumstances specified in subsections (5) and (6), to public bodies outside the UK. Similarly, if a body listed in subsection (3) wishes to disclose information which it has received from the panel, it can do so only to one of the other bodies listed or for the purposes listed in subsection (4).
	The effect of Amendment No. 274, which would delete Clause 444(3), would be that the Financial Reporting Review Panel would not have a stand-alone power to disclose information to the bodies listed in Clause 444(3). Those bodies could obtain information from the panel only if it was for a purpose specified in subsection (4).
	We oppose the amendment. It is impractical to foresee every legitimate purpose for which the panel might want to pass on information that it has obtained and provide an exhaustive list in primary legislation. The bodies specified in subsection (3) might be given functions in future in respect of which disclosure would be appropriate. Does the noble Baroness intend that these functions should be added piecemeal to subsection (4) as they were introduced? Subsection (4) was not designed to capture all the functions in respect of which the panel might wish to transfer information. It instead acts as a narrower, secondary gateway to restrict the onward transmission of information passed by the panel to one of the specified bodies in subsection (3).
	Perhaps I can give some specific examples of information which the panel would be precluded from passing on under this amendment. The Financial Services Authority has a power under the Enterprise Act 2002 to apply to the courts to stop traders infringing a wide range of consumer protection legislation. Under the Unfair Terms in Consumer Contracts Regulations, it can prevent the unfair use of a contract term which was drawn up for a general use in a financial services contract. It can take action against persons responsible for breaching specified contracts under the Financial Services (Distance Marketing) Regulations 2004. If the proposed amendment were to be approved, the panel would be precluded from disclosing relevant information to the FSA that could help it discharge any of those responsibilities, because not one of these functions is included in the permitted purposes that are specified in subsection (4).
	As these examples show, it is desirable to retain the flexibility of the current gateway arrangements because there could be many such legitimate reasons for the panel to disclose information to any of the bodies in subsection (3) that would fall outside the specified purposes in subsection (4). In light particularly of the recent extension of the panel's remit to make a proactive selection of accounts for review, such a restriction would be inappropriate and unhelpful as it could prevent a joined-up approach to the regulation of financial information and audit and accountancy in the UK. Both the panel and the bodies listed in subsection (3) are public bodies that are accountable for the exercise of their functions. We would not want to narrow these already restrictive gateways in ways that could hamper them in sharing information in the public interest.
	In responding to Amendments Nos. 452 to 454, I would like to be clear about the matters that the disclosure provisions in relation to the Takeover Panel in Part 22 were designed to facilitate and the constraints on them. Clauses 630 and 631 serve to implement Article 4.3 of the takeovers directive. The directive expressly states that confidential information held by takeover supervisory authorities may be disclosed by such authorities only in accordance with provisions set out in the law. Otherwise, if the provisions of Part 22 do not allow the panel to disclose the information, it cannot disclose the information.
	Amendment No. 452 would therefore stop the panel disclosing information to facilitate the carrying-out of its functions unless an alternative and express disclosure gateway existed. We have two important practical circumstances in mind when considering the disclosure avenue available to the panel under Clause 630(3)(a). They are appeals against panel decisions and applications by the panel to court to enforce its rulings. Following implementation of the takeovers directive, there will be a takeover appeal board, which will be separate and distinct from the panel. The appeal board will consider appeals against panel decisions. To do so, it will need to be put in possession of the necessary information by the panel. Equally, the panel is given a new power under the Bill to apply to court for enforcement of its rulings. To facilitate consideration of such applications, the panel will need to supply the court with relevant information. In neither case would disclosure be possible without the provisions in Clause 630(3)(a). These are very real, practical, regulatory matters. That is why the provision should remain.
	Amendment No. 453 would appear to lead to the result that the panel's power to disclose information for the purpose of facilitating the carrying-out of its functions would apply only in respect of the persons listed in Part 1 of Schedule 2. This is a very limited list and it does not reflect the range of persons to whom the panel will need to disclose the information in the exercise of its functions. We assume that the intent behind the amendment, as with Amendment No. 454, is to examine the distinction that we make between disclosures to specified persons under Part 1 of Schedule 2 and specified purposes under Part 2 of that schedule. In legal terms, the distinction is simple. The panel need not consider the purpose for which it discloses information in deciding to disclose to the small number of specified persons listed in Part 1 of the schedule. This should remain the case for very good regulatory reasons.
	The panel needs to work extremely closely with other regulators such as the Department for Trade and Industry and the Financial Services Authority. It would be extremely difficult to devise an exhaustive list of all the regulatory functions with which such bodies are involved for inclusion in Part 2 of the schedule. It is simpler and more straightforward for the panel to be able to disclose to such bodies without having to analyse on each occasion the purpose for which such disclosure is being made. Accordingly, in the absence of evidence of problems with the operation of gateways in equivalent legislation, we would not wish to impose additional burdens on the panel or restraints on its ability to share information with the specified persons, each of whom has a key interest in ensuring proper regulation and enforcement in the market place. I am not therefore able to support any of the amendments.

Baroness Noakes: My Lords, before the Minister sits down, will he explain two things? First, I think he said that the purposes set out in Clause 444(4) applied to onward transmission. I do not understand the distinction between primary transmission, if that is the correct term, and onward transmission. I would be grateful if he explained that.
	Secondly, I drew his attention to differences in drafting between Schedule 2 and Clause 444, particularly the fact that the takeover panel could make disclosure,
	"with a view to the institution of, or otherwise for the purposes of, disciplinary proceedings relating to the performance by an accountant or auditor of his professional duties".
	I expressed approval of that, but could not understand why there was not a similar purpose in Clause 444. I was questioning whether Clause 444 has been correctly drafted.

Lord McKenzie of Luton: My Lords, perhaps I might revert to the noble Baroness on that latter point, as I will need to look at it in some detail so that she has a complete response. With regard to onward transmission, that deals with the fact that the FRRP might pass information to a body that may or may not have the opportunity to pass it onwards to one of the other persons listed in these provisions. I think that is the thrust of the point on which she is seeking information. If not, again, I will follow up.

Baroness Noakes: My Lords, I am completely mystified by that because the Minister made a clear distinction about onward transmission, but I cannot see any such distinction within Clause 444, all of which is making me even more uncomfortable about the structure of these disclosure powers. The Minister has made a case for having "persons" as well as "purposes", and I will certainly read that in some detail, but if the only purpose is to avoid the Government having to specify things in detail—given that we are talking about exceptions to the principle that information remains confidential—I am not sure I have a huge amount of sympathy.
	Nor do I have any sympathy for the fact that purposes may change in the future. It seems to me that there is always a legislative opportunity, when dealing with a new function, to let Parliament determine whether an associated gateway is appropriate at the time a new function or body is created. It seems to us that that is the right time to consider that.
	The Minister gave a long and detailed reply, and we need to look at that carefully in order to clarify what the remaining issues are. I suggest to him that some issues remain in these clauses and schedules, but for today I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Baroness Noakes: moved Amendment No. 275:
	Page 208, line 29, leave out "sufficiently important" and insert "necessary and proportionate"

Baroness Noakes: My Lords, in moving Amendment No. 275 I shall also speak to the other three amendments in this group. As with the earlier groups, these amendments deal with both the FRRP in Part 15 and the Takeover Panel in Part 22, and they are in similar form.
	Under Clause 444 the FRRP may disclose information to an overseas body, but subsection (6) requires the FRRP to have regard to whether the likely use made by the overseas body is "sufficiently important" to justify making the disclosure. Amendment No. 275 replaces the words "sufficiently important" with "necessary and proportionate". Amendment No. 460 does the same thing with regard to the Takeover Panel's disclosures.
	The words "necessary and proportionate" have the immense virtue of creating equivalence and read-across to the Human Rights Act and the Data Protection Act, Acts of which we know the Government are inordinately proud. Those words are now a part of our law, and we feel it is important to have common tests applying to substantially similar situations where we are dealing with the rights of individuals potentially being removed, in this case in relation to confidential information. Furthermore, I understand that the word "necessary" would offer additional safeguards for individuals or businesses, because they would then have the option of applying for judicial review of any disclosures of information that would be made.
	I have put Amendments Nos. 276 and 461 with this group for the convenience of the House, though they are on a rather different point. When the FRRP considers disclosure to an overseas authority, it also has to consider whether the overseas body has adequate arrangements to prevent further improper disclosure. Amendment No. 276 adds the words "and effective". Amendment No. 461 seeks to achieve the same effect with a similar provision in Schedule 2 for the Takeover Panel.
	In our view the FRRP or the Takeover Panel should go beyond adequacy and focus on effectiveness. For example, the procedures may appear adequate on paper, but the way in which they are interpreted or operated may fall far short of the standards we regard as important. There is no point in pretending that bribery and corruption do not feature in the practical way of life in several important countries. It is important to look beyond the mere adequacy of the paper arrangements and consider how things work in practice. I beg to move.

Lord McKenzie of Luton: My Lords, both Amendments Nos. 275 and 276 would require the Financial Reporting Review Panel to have a greater oversight of the way the information it passes on to an overseas body through one of its gateways would be used and safeguarded. The first amendment would require the panel to consider whether the use that the body is likely to make of the information is "necessary and proportionate". Currently the panel needs to consider whether the use to which the body is likely to put the information is "sufficiently important" to justify disclosure.
	The proposed change to "necessary and proportionate" would require the panel to have a deeper understanding of the matters being considered by the overseas regulator to know whether disclosure would be critical to the exercising of its functions. The test of necessity would require a level of knowledge that the panel might not have about the relevance of the information in any particular case.
	Similar considerations apply to the proportionate test. The panel could meet particular difficulties in that regard if the overseas regulator was unwilling or unable to disclose to the panel the detailed information it would need in order to make an assessment about proportionality. The second amendment would require the panel to apply a double test. It would have to consider, as now, whether the overseas body had adequate arrangements to prevent the misuse or inappropriate further disclosure of the information. It would further have to determine whether those arrangements were effective.
	That second test would impose a significantly heavier burden on the panel than at present. It would be required to check the effectiveness of arrangements in practice as well as whether there were suitable processes there in the first place. The panel would need to expend considerably more resources to make this judgment, and I am not persuaded that it would deliver sufficient benefits justifying diverting the panel's resources in that way. The effect of these two amendments would be to restrict and delay the free flow of regulatory information between the panel and the overseas regulatory bodies, and to divert the panel's resources into lengthy consideration of the value of such exchange of information. I believe it would be unhelpful in a global marketplace, where regulators may need to exchange information quickly in the public interest.
	Amendments Nos. 460 and 461 replicate the intentions and consequences I have just described in relation to the Takeover Panel. They are undesirable for the same reasons. I hope I have made it clear I cannot support any of these proposed amendments.

Baroness Noakes: My Lords, we are disappointed that the Minister cannot support these amendments. They were designed to set higher tests because we are talking about the confidential information of individuals and businesses. To say that the FRRP or the Takeover Panel should not make inquiries about how the overseas bodies will handle the information in practice, or whether they have sufficient need for the information, or whether it is proportionate, seems to be putting the additional resources that are needed way over and above the rights of individuals, which are what we should be seeking to protect in dealing with information that is going to go to overseas bodies. Going to such bodies must place a higher duty than passing information through gateways within the UK.
	I will consider carefully the points the Minister has made and see if there is further clarification that can be had on this point. I will seek between now and Third Reading to understand why the Government regard resource requirements in these bodies as more important than the rights of individuals. I beg leave—

Lord McKenzie of Luton: My Lords, before the noble Baroness formally withdraws the amendment, I did not say that there would not be a request or that information would not be sought. I was trying to explain that to satisfy the necessary and proportionate test could involve a significant engagement with significant resource issues. In some instances it may not be possible to gain the information necessary to make that judgment, if that were the key judgment which had to be made.

Baroness Noakes: My Lords, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendment No. 276 not moved.]

Lord Sainsbury of Turville: My Lords, I beg to move that further consideration on Report be now adjourned. In moving this Motion, may I suggest that the Report stage begins again not before 8.30 pm?

Moved accordingly, and, on Question, Motion agreed to.

Police: Reorganisation

Baroness Harris of Richmond: rose to ask Her Majesty's Government what effect the plans to merge the 43 police forces in England and Wales will have on the fight against crime.
	My Lords, I live in the beautiful rural area of north Yorkshire. We are blessed with an excellent police force led with imagination and vitality and which produces, year on year, extremely good results. For example, this year the detection rate is 35.2 per cent—one of the best performance rates in the country. Arrests have increased and crime has fallen. We have 399 neighbourhood police officers, more special constables and 75 newly created community support officers. Generally speaking, the communities living within this huge tract of the country are satisfied with their policing and have plenty of opportunity to voice their concerns, should they have them, at the various partnership meetings and police authority meetings held regularly up and down the county.
	I was privileged to chair my county's police authority for a number of years and I retain an active interest in policing generally, having spent more than 20 years as an elected member of a police authority and its predecessor police committees, and as a member and deputy chair of the Association of Police Authorities. I was also a magistrate for 16 years. I was deeply saddened, then, to see the former Home Secretary's decision to radically alter the structure of forces and police authorities on the advice of one former chief constable producing a report of staggeringly simplistic conclusions. The timescale for such enormous changes is ludicrous. An affirmative order after just four months' consultation is the only thing necessary for the Government to wipe out years of stable, carefully balanced and considered policing for local communities. It will make central control of huge forces much easier, and there will be demonstrably less scrutiny by locally elected people, who serve on their authorities, because there will be fewer places on these new authorities, which will cover much larger areas. As the Police Federation of England and Wales so aptly put it, if amalgamations go ahead, the public must be left with an improved, more effective force able to provide better service. There is absolutely no indication that making forces merge to create monster organisations will do anything at all to improve policing for local communities. Reform should be carried out on a basis of service effectiveness, not just financial efficiency or, I add, political expediency.
	While I acknowledge that my force and police authority have agreed to an amalgamation with south and west Yorkshire and Humberside—a simply vast area of England—those forces do not want to merge with us. District councils and the City of York are also unhappy about many aspects of the decision to merge, albeit that the submission is hedged about with caveats so great I do not believe that the Home Secretary will take much notice of them.
	The Police Federation in north Yorkshire suggests a federation of forces in our region, and that is supported by a cross section of Yorkshire parliamentarians. A federation of forces would allow greater collaboration between forces on protective services, as happens now to an extent, and we call it mutual aid. Services such as air support, firearms training, clothing and vehicle procurement and so on, can all be done through collaboration, and that could be put on a more formal footing, but the individual forces could maintain their independence and local accountability to their communities. As your Lordships may imagine, there are huge differences in policing needs within this vast region, and, indeed, not just in the north. Up and down the country I am being made aware of similar deep concerns.
	In a letter that I received from the chair of West Mercia Police Authority I am told that there is very considerable public opposition in its area and that its local government partners have also expressed their opposition. Surveys there have shown that more than 80 per cent of respondents are against a merger. West Mercia is set to merge with West Midlands, Staffordshire and Warwickshire. It makes no sense at all. The letter goes on to quote Mr Blair, then shadow Home Secretary,
	"a wholesale amalgamation of the smaller police services . . . will remove local policing further from local people".—[Official Report, Commons, 5/7/1994; col. 273.]
	We are told that things have changed dramatically since then, but the things that concern most people are the locally disruptive crimes and anti-social behaviour, just as it has always been. West Mercia is not alone in finding such adamant opposition to these proposals. How amazing that Wales should be one single force. But I shall let my noble friend Lord Roberts of Llandudno speak about that.
	Let us now move to the cost of these amalgamations. These vary widely, as might be expected. The Home Office says that amalgamations in north Yorkshire will cost £39 million and the police authority says that it will be £52 million, but even a £13 million variance is a pretty sizeable chunk of money to be wasted on a huge bureaucratic exercise which will be of no appreciable benefit to the policing of communities. It diverts money from where it is needed—front-line policing and the fight against organised crime. Multiply that amount throughout England and Wales, in each force and each police authority, and we begin to see what a fabulous amount of money—£500 million has been mentioned—can be squandered on a premise that our protective services are insufficiently robust to meet the new demands on our policing service. There has been no accurate costing of any of these amalgamations, but I refer noble Lords to an article in Police Professional by the Chief Constable of Gloucestershire, who is head of the ACPO Finance Business Area. Time does not permit me to quote from it but it makes very interesting reading.
	Of course it is right to ensure safety and security but there are ways of producing structures to enable that other than the major structural upheaval envisaged by amalgamations. Large-scale serious crime must be effectively addressed but surely the needs of individual communities for policing, focused on local crime and providing proper levels of service for individuals and localities, are equally important.
	We used to have regional crime squads. I know as I was a member of one; it dealt with organised crime, terrorism and other serious national policing activities. It worked closely with police forces, not always amicably but at least with greater accountability than anything we have seen since their amalgamation into a National Crime Squad, and further still into the Serious Organised Crime Agency. I believe that by creating those squads again we could deal effectively with the Level 2 crimes which so taxed the HMIC, which wrote the report on force amalgamations. Has that ever been considered?
	Has the Home Office looked at perhaps extending SOCA's remit to bring together all policing of a national function around organised crime, which is being dealt with at present by the Metropolitan Police and in specialist branches within provincial police forces? Has the Home Secretary looked at creating a national border force, bringing together the present border control functions of Customs and Excise, the Immigration and Nationality Directorate and all the police posts that guard ports and airports? Indeed, would it not be better to look at merging functions instead of forces?
	There are serious questions of governance, accountability and membership of the new police authorities but the most important in my eyes is the loss of the tripartite system of policing we have enjoyed so successfully for so many years, and in which policing by consent is enshrined. That is set to be swept away in the forthcoming Police and Justice Bill as the Home Secretary takes more and more powers unto himself. The merging of forces is but a foretaste of what is to come; that is an argument for another day.
	I will end on a sympathetic note to our police service. Merging police forces is not the answer to delivering the quality of service that we now demand from our police. They can be forgiven for feeling jaded and cynical. They have been delivering the goods; and now they are told that once they are bigger, they will be better. A recent study by the Rowntree Trust said that making local organisations much bigger never in the past demonstrated any concerted improvement and represented a significant loss of democracy. Clarity of accountability will be lost, where there should be transparency. Small urban populations and semi-rural and rural communities up and down the country will be marginalised.
	Already a quite enormous amount of paperwork has been undertaken by order of the Home Office in all the forces for which these amalgamations will be effected, taking away from active duty able and highly regarded police officers; instead up and down the land they have had to toil away at the Government's behest justifying or otherwise whether they should merge with each other—what a complete waste of their time. One size does not fit all; there should and could be different solutions to this perceived problem. I urge the Government, even at this late stage, to look at them. The identification of a constabulary with the community from which it is drawn and which it protects is of substantial value; indeed it is the relationship that defines policing by, for, and with its local community. We change it at our peril.

Lord Jones: My Lords, I thank the noble Baroness, Lady Harris of Richmond, for initiating this debate and for her cogent and topical remarks as a distinguished police authority member. I begin with a tribute to the North Wales Police Force. In another place, my duties led to my asking hundreds of times for its assistance to countless ordinary people. It is a good force, and it always responded very positively. It faced up to the challenge of crime. I also acknowledge the dedicated work of councillor Malcolm King on the North Wales Police Authority.
	The North Wales Police Authority is set to merge with the Mid and South Wales Police Authorities; instead of four there shall be one. In north Wales, there is consternation and no little apprehension at the impending merger. The police authority has raised objections; so have the Members of Parliament and the Assembly Members from north Wales; but to no avail. My request is that the new Home Secretary will send for the file, study it, and rule that the North Wales Police Authority shall retain its identity as a crime fighter.
	The North Wales Police Authority is far flung territorially. From the wave-pounded tip of Llyn to the ancient walls of Chester city, and from Anglesey's Amlwch to beyond the lakes of Bala and Vyrnwy in Merioneth and Montgomery, we are measuring many, many miles, with unique linguistic and societal conditions. It is rather special. Travel from Cardiff in the south to the northern counties is not easy given the Snowdonia massif, the Harlech dome, the Brecon Beacons and the Black Mountains, to mention but a few impediments to modern policing.
	Even at this late stage, my hope is that the Secretary of State for Wales, the First Minister in the Assembly Government and the leaders of the North Wales Police Authority should meet, discuss and consequently combine to urge the new Home Secretary to take the North Wales Police Authority out of the all-Wales police proposals. The people of north Wales already feel that distance tends to separate them somewhat, perhaps inevitably, from the processes of their Cardiff Assembly Government. So they do not want the police headquarters of Wales to be up to 200 miles away as well; that is not on.
	The Welsh Affairs Committee in another place said that a one-size-fits-all approach does not take account of,
	"the unique political, geographic and cultural characteristics of Wales".
	It is right. Little wonder there are sceptical, even cynical, voices to be heard in all of this. The appointment of the new Home Secretary enables the First Minister and the Secretary of State for Wales to revisit the proposals to the advantage of north Wales. Why risk the huge practical problems? Why risk greatly escalating operational costs? There is no discernable body of north Welsh opinion pressing for this massive change. The Home Office should know that in north Wales our villains are from Merseyside; so it is insane to tackle them from the south!

Viscount Trenchard: My Lords, I am grateful to the noble Baroness, Lady Harris of Richmond, for introducing this timely debate today. I am very happy to say that I strongly agree with what she said. The Government's proposed mergers of police forces will do very little to assist the fight against crime, but I fear that they are already distracting valuable police resources away from their proper purpose of serving and protecting the community.
	Sir Ian Blair, the Commissioner of the Metropolitan Police, said in his recent Dimbleby lecture that the public should decide what kind of police we want. He said that it was time for a national debate on the subject. That debate should surely also cover the question of leadership in the police force. The commissioner spoke about the difficulty that the service faces in recruiting,
	"the best brains and the most balanced characters".
	As early as 1927, a Royal Commission found that Peel's policy for filling senior positions in the police service no longer met modern needs; that means "fit for purpose" today. Perhaps consideration should be given to re-establishing the Hendon Police College, to recruit officers from a broader range of educational backgrounds than Peel's legacy permits.
	It did not surprise me at all that the former Home Secretary—who was fond of saying that our 43 mainly county-based police forces were no longer fit for purpose—showed no inclination to initiate the kind of national debate on policing that the commissioner suggested we need. Some of the minority of chief constables in favour of mergers cite as one reason that the mergers are inevitable because the Government have decided so. I was not surprised at Mr Clarke's approach, having experience of his leadership of the Cambridge students' union in the early 1970s and the authoritarian and confrontational style that it adopted in dealing with the university authorities, the police and those members of the student body who dissented from its anarchic views. However, we have a new Home Secretary, Mr John Reid. The Prime Minister clearly considers him fit for purpose to take responsibility for the police, even though he represents a Scottish constituency. As your Lordships are aware, Scottish police forces are not affected by the Government's ill thought-out proposals, even though only one has more than 4,000 officers and many have fewer than 1,000.
	There may be a case for a national police force in England and Wales, but it has not been properly made. If we are to retain locally organised police forces, they should be at a locally accountable level. The best level in very many cases will be the county. People still identify strongly with their counties, and many county forces enjoy a strong esprit de corps, which could so easily be lost as a result of the Government's intended amalgamations. I fear that this Government tend not to give enough consideration to such important factors, whose value cannot easily be calculated in money terms.
	Ties with local communities would be weakened by the creation of remoter regional forces. Much more consideration needs to be given to options other than mergers, involving closer co-operation between forces and the pooling of resources where appropriate to maintain specialist needs. The Government have by no means made their case that larger forces are more efficient because they are larger. Their own police reform project in 2004 found that force performance efficiency and resilience varies but was not related to size in the evidence examined. In an attempt to persuade more police authorities to agree to mergers, the Government have offered to meet the costs of restructuring. But I know that my own authority—the Hertfordshire Police Authority—believes that the figures being quoted by the Home Office fall far short of the true costs.
	There may well be some cases where mergers are the right way forward, but I believe that it is completely unacceptable for the Government to force through any merger of a police force against the wishes of the local community or where the police authority does not agree, especially given the inadequate amount of time that interested parties have been given to respond to the Government's plan. The new Home Secretary should abandon the whole merger exercise and put our senior police officers back to work to track down the former criminals who should have been deported but are still at large.

Viscount Tenby: My Lords, I congratulate the noble Baroness on putting down this Unstarred Question and on kick-starting the debate with an arresting speech.
	I think that it is right to say that opposition—and it is cross-country and cross-party opposition—to the proposals centres around a number of major concerns: the timetable; the possible cost to council tax payers; the threat to local policing and the effect on the police themselves; and whether finally such a solution, as opposed, say, to federation, will help in the fight against cross-border crime and terrorism.
	The timetable for the process is, and in some cases has been, unwisely short, and to date only two forces have voluntarily agreed to merge. I was most interested to hear the remarks of the noble Lord, Lord Jones, and I want to hear what the noble Lord, Lord Roberts of Llandudno, has to say about the grotesque political decision to merge the police in Wales into one body. The biggest upheaval in the structure of the force for 40 years surely merits a period for discussion and informal, unprejudiced analysis. It is true that some forces, as presently constituted, are almost certainly too small to cope with the new brands of cross-border criminality and changed circumstances.
	What steps have been taken so far to set in place co-operation between different forces? What arrangements are there for the pooling of resources such as aircraft, helicopters and boats? Can the Minister confirm that IT compatibility and full user co-operation is in place in all forces within England and Wales? To repeat a question that I asked in the debate in March, and to which I have yet to have a reply: are there any plans to draw together within a national framework Special Branch officers scattered throughout the country within the various forces? I should be grateful for the Minister's answers to those specific questions.
	Next, I turn to the issue of cost. It does not take a guru to point out to the Government in political terms the danger of adding merger costs to already overloaded council tax bills in a process which is likely, under present plans, to surface at just about the time of the next election. The threat to council tax payers inherent in the equalisation process—as yet, barely comprehended by anyone—will become apparent when, in many cases, council tax payers find themselves paying a higher precept for themselves and receiving reduced services.
	On the threat to local policing, I am a little more sanguine. A good local structure with dedicated and experienced officers should be able to withstand any shake-up, but I am worried about the morale factor in affected forces. Mergers inevitably must mean redundancies, anxieties about career prospects, and posting for families out of area and so on. What long-term plans are there to reassure staff at all levels that they have meaningful career prospects?
	Management of amalgamations and operational control of new enlarged forces will require special skills. Is the Minister satisfied that there is a large enough reservoir of talented senior officers to meet this need?
	In the final analysis, and to emphasise again the point that I have already made, it does not much matter whether one has 43 or 12—or any number you care to think of—forces. If they are unable to communicate properly with one another or the other component parts of the justice system in as short a time as possible, then we are not one step further towards combating serious crime and terrorism.

Lord Phillips of Sudbury: My Lords, I, too, congratulate my noble friend. We have only four minutes each, which is about as rushed as the timetable adopted by the Government over this fundamental reform.
	I want to speak about the county of Suffolk, where I grew up and where I still live. Sudbury was part of a tiny area called the Boxford division. Boxford was a village. We were then part of the West Suffolk authority, which is now part of the Suffolk authority, and, if the Government have their way, there will soon be a three-county authority. That will be expensive—estimates are of the order of £0.5 billion just for restructuring. In Suffolk, the cost will be £30 million. The savings are entirely speculative, and if economies of scale are expected, I caution the Government to think again. Most business mergers are carried out on the basis of economies of scale and most of them do not achieve them. It is even worse in the public sector—you have only to look at health and education to see what I mean.
	I sometimes think that all the argument about achieving a critical mass for police forces will achieve only a critical mess. This is not about selling beans. Policing is an incredibly complex business. I suggest that we have already suffered the effects of taking too much account of hardware and organisational organograms and too little account of the soft virtues—the creation of trust between police and public, the creation of loyalties, and the creation of ownership and identification by the citizen with regard to the police. Those have already been severely damaged, and the admirable attempt through the low-tier policing units to try to restore some of that local policing will be severely set back—permanently set back, I consider—if this shotgun set of mergers proceeds. It will be distancing, destructive of the police/public relationship and, most of all, will affect informal intelligence. That is what has really suffered under the reforms of the past 20 or 30 years. The flow of informal intelligence from members of the public to known and trusted coppers has been severely dented and this will make it worse. There is no point in pretending that having three huge counties amalgamated as one will do anything but distance the citizen from the police. It will also distance the police from the police.
	So I come back to some basic principles. In a democracy and in policing, a bottom-up, organic development is likely to achieve its purpose. I believe that federal collaboration is infinitely better—certainly in East Anglia—than a forced merger. ACPO said as much on 25 January. I want briefly to read what the Suffolk Police Authority said when it delivered its outline business case in October. It said of the merger that,
	"it has been difficult to identify any substantial benefits for the people of Suffolk . . . The Police Authority feels that the Tool-kit"—
	that wonderful rubbish—
	"focuses on protective services at the cost of other important areas, including the need to ensure neighbourhood policing is fully embedded, and to the potential detriment to strong local partnership working".
	It continues that little regard has been had to the,
	"current high performance and efficiency",
	of the service. So it is, and I urge the Government to think again.
	In closing, I have to say again, although I do not enjoy saying it, that the timetable for all this is scandalous. Closing the gap by Mr O'Connor—I would call it "Widening the gap"—was produced only in September. The Home Secretary responded within three days. In Suffolk, we received formal notice from the Home Secretary last month of his intention to amalgamate, yet the consultation has not yet begun—talk about "cart before the horse". The date for objections is 11 August, and by December next we are supposed to have a shadow joint police authority between three counties. That is not serious politics, it is not serious consultation and it is not listening, and it will not do.

Lord Bradshaw: My Lords, I am a member of the Thames Valley Police Authority and have been for 11 of the past 13 years. Can the Minister tell us tonight why, in this age of so-called joined-up government, we have two departments—on the one hand, the Home Office and, on the other, the Department for Communities and Local Government—setting out proposals for reform which have diametrically opposed objectives and means of achieving them?
	David Miliband, the then Minister for Local Government, set down five principles against which proposals for reform were to be developed. Within those proposals for local government, which will now be taken forward by Ruth Kelly, is a strong element of voluntarism. That is, he is asking local authorities whether they want to merge. He started at the bottom and not at the top, telling them what to do; he is asking them what they want to do. He said that there would be no compulsion. He also said that it must cost no more money. Two large government departments are talking to people with an entirely different voice. I ask the Minister not to give us some waffly answer, but to tell us why these two departments are talking with forked tongues. The Government are talking with a forked tongue. It is completely baffling to people in local government who are charged with managing the local police force.
	In his comments so far—in a White Paper to be—David Miliband has placed strong emphasis on local empowerment, which is about allowing people the opportunity to shape their communities and to ensure that services are delivered in an efficient, integrated and value-for-money way. I am sorry, but Mr Clarke's proposals do not meet any of those principles. They are being inflicted on local government at the same time because police authorities are part of local government.
	We should contrast David Miliband's approach with the position of the police, where economy in the first few years will not happen. I have taken part in a number of such reorganisations. Some did not even take place in the end, but all cost vastly more money than was ever envisaged at the outset.
	Forces are to be separated from local communities, except for very local crime, such as criminal damage. Accountability will be destroyed. In the large police authorities, about which my noble friends Lady Harris and Lord Phillips have spoken, if we have three-county or four-county mergers, how will members of the police authority be accountable? There will be so few of them covering such large areas that they will never be accountable to local communities. In the case of north Wales, I, too, have spoken to Malcolm King and have heard the despair of somebody who has always supported the Labour Party and who was Labour through and through; I have spoken to several other members of police authorities who think that the Government are stark, staring mad to go forward with these proposals. I hope that the Minister will say that the new Minister will at least look again at these proposals.
	My authority will stand alone. Will the authorities that stand alone have money for local policing or protective services, or will all the money go to the amalgamated forces?

Lord Roberts of Llandudno: My Lords, we have already heard from three other Peers—my noble friend, as I shall call him, Lord Jones, the noble Viscount, Lord Tenby, and my noble friend Lord Bradshaw—about the terrible discontent in north Wales. Wales is overwhelmingly against these mergers.
	As recently as 27 April, the chair of the Police Authorities of Wales said in a letter:
	"I am writing to express our concern at the current process to restructure the four Police Forces and Authorities in Wales into one Strategic Police Force and Authority".
	The issues raised are the haste of the changes, finance and funding, precept equalisation, governance and accountability. All those issues have been touched on already.
	The chairman of the North Wales Police Authority, Councillor Ian Roberts, was one of six police authority chairmen who wrote to the Times this very Monday urging the new Home Secretary to think again. They said:
	"The current proposals are being rushed through . . . [they] could lead to a damaging reduction in performance, a collapse in neighbourhood policing, and a significant loss in accountability. Opinion Polls show overwhelming public opposition".
	Councillor Roberts has said elsewhere that it was a crash waiting to happen.
	That contrasts so much with a Written Answer from the Home Office Minister to me on 20 April this year, which stated:
	"All four police authorities in Wales recognise that the option of a single strategic force for Wales is operationally viable, although they share some concerns".—[Official Report, 20/04/06; col. WA 252.]
	Some concerns! What a massive understatement of the opposition to the proposals. The truth is that the Government, having made up their mind, refuse to listen or respond to any doubts or opposition.
	It was the same with the debates on interviews for passports. Only last week, we were told that there would be remote area webcam interviews. Of course these lead to identity card interviews, but how can you take somebody's fingerprints or iris scan by webcam? These issues have not been thought through. They are a total muddle, as are these merger proposals.
	There is a vast difference between policing a lightly populated rural area and policing a heavily populated urban area. The crime rates are vastly different. Last year, Newport, Gwent, had 141 offences per 1,000 people. Dyfed-Powys on the other hand has the lowest crime rate in the whole of England and Wales—much less than half that of Newport and Cardiff. The policing is different. Dyfed-Powys has fewer inhabitants per square mile than anywhere else in England and Wales—an area of 4,227 square miles with a population of 503,663.

Lord Phillips of Sudbury: My Lords, what about the sheep?

Lord Roberts of Llandudno: My Lords, it has more sheep than people.
	Gwent has a similar population but only an eighth of the area to be covered, so policing has to be different. It takes me less time to travel from the north Wales coast to London than it does to travel to Cardiff. Some would say that the answer is for Llandudno to be a subdivision of the Metropolitan Police because we are closer to London than to Cardiff in travel time. Effective policing demands local knowledge, quick responses and a manageable area. I suggest that to merge the four Welsh forces would meet none of these requirements.
	Finally, when I was a youngster, my area was part of the former Caernarfonshire county constabulary. It was merged to become the Gwynedd police area, which was enlarged to become the North Wales Police Authority. Now the proposal is for an all-Wales authority. The next step could only be a further merger into one police authority for the whole of England and Wales—a national police force with a national database provided by the new identity cards legislation. I believe that I am not the only Member of your Lordships' House to fear such a move.

Lord Dholakia: My Lords, I have been a magistrate member of a police authority and a member of the Police Complaints Authority. From time to time, I have also offered independent advice to the Metropolitan Police service. It should therefore come as no surprise if I express my concern about restructuring the 43 police forces into bigger strategic forces.
	We have the example of the probation service. Suffice it to say that despite additional resources and repeated tinkering with structures, there is serious concern about whether the probation service, as organised today, can meet its objectives. I have no doubt that the police service may face the same problems.
	The reason is quite obvious. The current debate is not as complete as it should be. The real issue is to identify the requirements of public safety and security in this country. We must remember that policing is just one aspect of this discussion, albeit an important aspect. However, instead of having a wider discussion, we seem to focus more on the reorganisation of police forces.
	There is a lot of useful material in Sir Ian Blair's Dimbleby lecture, which was rightly mentioned by the noble Viscount, Lord Trenchard. Yet we go on tinkering with structures rather than opening up a national debate and consultation about policing in Britain today. The Government have an unending appetite for increased centralised control of policing and other criminal justice issues, about which I shall have more to say when the Police and Justice Bill reaches your Lordships' House.
	The Government have failed to identify a structured set of proposals for the future of law enforcement in this country. The approach is piecemeal and opportunistic. Let me pursue my earlier arguments. The Government have introduced all manner of legislation, creating new civil and criminal offences. They have attempted to reorganise probation and aftercare services, revised the NCS and NCIS, established SOCA and introduced a host of legislation affecting control of policing. But they have never published an overall approach as to what policing in the 21st century is all about. They just talk about "vision", "business plans" and "action plans".
	The questions that we must pose are simply these. What law enforcement functions have to be performed? How best can these functions be provided given the constraint of resources? What organisational arrangements should be implemented to resolve the fundamental issues of what should be done and how? These questions ought to fuel any discussion about law enforcement as a whole, not just about the future of policing. Instead, we have the Home Secretary introducing more and more piecemeal structural changes in policing. Any meaningful debate must include consideration of all agencies with a criminal law enforcement responsibility, those involved in intelligence and information gathering and those charged with national and public security.
	I issue a word of warning: it is extremely poor management policy to seek to improve performance simply by restructuring, and then to do so in isolation. Functions must come first. You first define what needs doing, and then decide on the most appropriate way to do it. No one underestimates the real and pressing operational commitments, and the debate must take those factors into account. We are putting even greater demand on agencies. These include cross-border activities, internationally and across police force borders. Local police forces obviously find it difficult to deal with such incidents, still less to prevent or disrupt them. That is why NCS and NCIS were established, to provide a national intelligence information facility to support law enforcement agencies. The most recent of these agencies, even in the way in which its functions have mutated, creates a void; many senior police officers to whom I have spoken are worried that, under these circumstances, the creation of SOCA creates a vacuum.
	We find that we have taken existing resources and reflected them within a new institutional structure. For the sake of the security and safety of our country, I pray that this works. But it demonstrates a classic case of the age-old formula: when in doubt, reorganise. We need to answer the fundamental questions about policing, as the Royal Commission did some 40 years ago. It is time to see what revisions are necessary. The Minister should take a message to the Government: think again, because these issues will surface when the Police and Justice Bill reaches your Lordships' House.

Viscount Bridgeman: My Lords, I am not alone in thanking the noble Baroness, Lady Harris of Richmond, for initiating this interesting and meaningful debate. Nor am I alone in deploring the undue, even unseemly, haste with which this programme was pursued by the previous Home Secretary. The change of regime at the Home Office provides a great opportunity to stand back and readdress the whole proposal, let alone the absurd timetable for putting it into effect.
	The abolition of the Office of the Deputy Prime Minister provides another opportunity to readdress the negative effect regionalisation is having on this matter. I hesitate to intrude on the eloquence of the Welsh noble Lords, but why is it, for instance, that Cheshire was not allowed to consider amalgamating with North Wales? That would make far more logistical sense than for the latter to merge with the mid and south Wales forces, as noble Lords have pointed out. I, like many noble Lords, will have had briefings from West Mercia, East Midlands and Cleveland forces, among others, making a strong case for independence, each expressed in different ways.
	Several noble Lords have talked about the advantages of federation, most eloquently the noble Baroness, Lady Harris, in her opening speech. This route has the great advantage, if properly structured, of preserving the relationship of the local force with the community it serves, upholding a tradition which goes right back to Sir Robert Peel. This involves the sharing of specialised services—for instance, the back office, forensic work, firearms training—and the sharing of expensive equipment such as helicopters. Work was well advanced on this procedure by Surrey, Kent and Sussex, and cut short by the previous Home Secretary's announcement setting out the programme for amalgamations which has attracted so much criticism. It is in operation already, in various degrees of development, between a number of other forces and has the great advantage of flexibility. It certainly avoids the traumatic effect—and, indeed, cost—of larger former amalgamations to which many noble Lords have referred. An argument advanced against this form of co-operation is that certain police officers, and perhaps their committees, might see their forces as sacrosanct and be unwilling to co-operate. However, the Police Act 1996 gives the Home Secretary the power to direct such a course.
	I do not wish to intrude on private grief, but perhaps it is revealing—I am updating the noble Baroness, Lady Harris—in the light of the events of last week that, on 18 January this year at Prime Minister's Questions, the Prime Minister said:
	"It is important that we listen to local people, and I can assure the hon. Gentleman that we will do so. Of course, many different things could happen, including forces coming together for certain strategic tasks that they are better able to fulfil on a common, rather than singular, basis".—[Official Report, Commons, 18/1/06; col. 836.]
	Or again, on 25 January, when he said:
	"We have to listen to what people are saying and, obviously, there are different views about police reform. One possibility is for strategic coming together on certain issues, rather than mergers, but that has to be looked at on a case-by-case basis".—[Official Report, Commons, 25/1/06; cols. 1425-1426.]
	Miss Hazel Blears appeared to have decided that enough was enough. She was reported in the Times the next day as saying that she, the Minister for Policing, Security and Community Safety, had the power to order police mergers. Forces would need compelling cases to survive and show that they could match bigger forces. Is this joined-up government?
	Mr Clarke has gone, Miss Blears has gone and the Office of the Deputy Prime Minister has gone. The Prime Minister has not yet gone. Let us hope that Mr Reid will listen carefully to the Prime Minister's words. This is a great opportunity drastically to modify this ill-thought-out plan with a timetable that beggars imagination. I hope that the new Home Secretary will see the best of the federation plans as a model and roll them out across England and Wales. Will the Minister also, with the passing of the ODPM, examine the regionalisation programme and recognise that criminals do not, on the whole, recognise regional boundaries? That way, we can effectively fight crime, the subject of the Question tabled by the noble Baroness, Lady Harris.

Lord Bassam of Brighton: My Lords, I pay tribute, as all other speakers have done, to the noble Baroness, Lady Harris, for raising this debate in such a timely way, and for focusing so neatly on the important range of issues. I congratulate all other speakers, because they have, in fairness to them—although I am obviously going to disagree with their points—highlighted the evident concerns in a national debate. That is important. I was particularly keen to hear what people have to say about issues such as cost, local identity, the importance and value of esprit de corps, the key questions on resources and, in general, public reaction as well.
	Having congratulated all on their contributions, we ought also to reflect on where we are with the policing of our country. Since Labour has been in government, we have had more resources for the police service. We have more police officers than we have ever had—an historic high. We have more police support and staff and, of course, critically, we have a new and directly focused central government agency to attack high and big crime. There have been significant improvements as a consequence.
	It is also important that we are aware of the significant benefits police restructuring can bring in our fight against crime, the central point of the Question. Before I describe how restructuring will enhance the police service's performance in tackling both level 1 and level 2 crime, I want first to set out the current situation.
	As we know, the police service under the current 43-force structure has made—as all speakers attested—significant strides in dealing with level 1 crime. Success at that level has been driven by strengthening local policing—something we all support—which is structured around the basic command unit, to use a bit of jargon. We have seen a 35 per cent reduction in overall crime since 1997, and the fact that the chances of being a victim of crime are at their lowest since the British Crime Survey began in 1981 is something we can all welcome. This Government are further determined to build on achievements at a local level, as demonstrated by our commitment to providing dedicated, visible, accessible and responsive neighbourhood policing to all areas by 2008.
	Notwithstanding the success at local level, we are committed to further improvements as part of our programme of reform and want to develop a police service that is fit to tackle the complexities of 21st century crime; that is, one that is fit for purpose. We have now had more than 30 years of the current structure, and there is a clear professional acknowledgement of the need to address the gaps in protective services highlighted in HMIC's findings. In this evening's debate, I did not hear recognition of the wide changes in our society or an acknowledgement that what was fit for purpose 30-plus years ago is not necessarily fit for purpose in the 21st century. The noble Lords, Lord Phillips and Lord Roberts, and other noble Lords talked about the small forces that merged into larger forces and then merged into even larger forces. There was a reduction from something like 168 forces in 1964 to the current 43 by the end of that decade. That was for a good reason: forces needed to be larger to deal with the complexities of the time. We believe that forces need to be larger now to deal in a targeted and focused way with cross-boundary issues and widespread criminal activities that spread across the country. Notwithstanding that, we also need to focus on local crime as well. That is why the BCU structure is so important.
	I want to try to answer the points raised, and I encourage the noble Lord, Lord Phillips, to restrain himself. I know it is difficult. Some of the stark findings in HMIC's report were that,
	"less than 6 per cent of over 1,500 big organised crime gangs are targeted by police in the course of a year . . . three quarters of forces did not have fully resourced specialised murder units",
	and,
	"only 7 out of 43 forces deploy special branch alongside neighbourhood teams and capture community intelligence".
	That is all due to the lack of capacity and capability within the current police force structure to tackle serious and organised crime effectively. To address that, HMIC has recommended the development of strategic forces in order to equip the police service to provide effective level 2 protective services. These include serious and organised crime, counter-terrorism and domestic extremism, civil contingencies and emergency planning, critical incident management, major crimes such as homicide, public order and strategic roads policing.
	A large part of this debate focused on accountability. That needs to be kept in perspective. Our current police authority structure means that people feel remote from the police authority. We need to build back at a lower level, and that is part of our reform agenda. We need to understand that. We have been working closely with the Association of Police Authorities, the Association of Chief Police Officers and others to strengthen governance and accountability arrangements at force level and at the level of basic command units. That is where we need to put additional effort. So I reject the contention of the noble Lord, Lord Bradshaw, that new localism—the Miliband argument, if you like—and the merger approach that we are adopting in the Home Office with regard to police authorities are necessarily at odds with other. I do not believe that they are.
	We continue to see a vital role for police authorities in the new landscape. Provisions in the Police and Justice Bill, to which the noble Lord, Lord Dholakia, referred and which was introduced in the other place in January, will strengthen the membership and functions of police authorities. It will be important for police authorities to focus on their core strategic functions; namely, setting policing priorities for the force area, appointing the chief constable and other chief officers, holding the chief constable to account for the discharge of his or her functions and setting budgets for the force and the policing precept. Basic command unit commanders and senior representatives of other responsible authorities will also hold regular public briefing sessions and open sessions to respond to issues raised by local communities.

Baroness Harris of Richmond: My Lords, that is exactly what happens now. How will it be different?

Lord Bassam of Brighton: My Lords, that is essential. If it happens now, we want to ensure that it is better performed in future. It is essential to the way in which accountability works, and I am sure that when the noble Baroness was the chair of a police authority—and she was a distinguished chair of a police authority—she made sure that there was accountability at local level for operational issues. That is where we need to put the effort in.
	At BCU and district level, we are strengthening crime and disorder reduction partnerships. In January, we published our findings of the review of the partnership provisions of the Crime and Disorder Act that set out a number of measures for enhancing the effectiveness of partnership working. We will set out in regulations national standards for those partnerships. Among other things, they will mandate the involvement of the councillor responsible for community safety matters in setting community safety priorities. We will also set national standards for engagement with local communities—we can all agree that there needs to be more of that—to ensure that community safety priorities properly reflect local concerns. Those priorities will, in turn, determine which issues are addressed by neighbourhood policing teams, which will be operating in every community by 2008. Finally, where these measures still leave unresolved persistent local problems, we will empower those who live or work in an area to trigger action through the community call for action. Taken together, these measures provide for a significant enhancement of the accountability of strategic police forces.
	Her Majesty's Inspectorate has demonstrated that the development of strategic forces will bring significant benefits in our fight against crime and will genuinely create a police service that is fit for purpose in the current century. It believes that those benefits will include increased critical mass providing the required capacity, capability and resilience to respond effectively to serious crime or public order incidents to national standards. It also believes that that will enable the enhanced numbers of specialist teams—including major investigation teams, armed response teams and intelligence gathering—to work effectively.
	At present, because of smaller forces, many officers hold a number of crisis management roles and responsibilities that can conflict. As a result, we frequently get situations where the officer with the training and expertise to deal with a fatal car accident may also be the only officer available with the training and expertise to deal with a firearms incident. However, the larger the force, the easier it will be shift resources around because there will be more officers with that expertise in a force area. Through the renewed emphasis on service delivery, we hope that we will see an end to officers having to decide which crisis to attack first. Through this process, we will also see increased proactivity in countering organised crime through enhanced intelligence gathering, analysis and sharing. In our view, that will ensure better understanding of communities.
	It is sad but true that terrorists and domestic extremists live among us in our communities, but only one police force in six has special branch officers working alongside neighbourhood police. If we are to prevent attacks in future and catch those responsible, we must ensure that counter-terrorist staff are working hand in glove with local police, picking up the community intelligence that will enable terrorists to be identified and stopped before they wreak their havoc. The creation of strategic forces will mean we can invest in specialist teams and ensure that those vital links are in place and that community intelligence is gathered and acted on in a systematic way.
	We also believe that the mergers will mean that there is less need to abstract resources—

Lord Phillips of Sudbury: My Lords, is the Minister aware that in Suffolk, Norfolk and Cambridgeshire the last terrorist act happened during the Peasants' Revolt and officers deployed for that purpose would twiddle their thumbs?

Lord Bassam of Brighton: My Lords, the noble Lord makes a sharp observation but he also knows that people from those counties will have been affected in different ways by terrorism. It is sad but true.
	One of the arguments raised by a number of noble Lords was on collaboration and federation. I remind noble Lords that the development of regional initiatives in the 1960s and 1970s through regional crime squads was a less than happy experience. Sir Ronnie Flanagan, the head of HMIC, says that existing collaborative arrangements are woefully inadequate; he believes that they will fail to deliver sustained restoring for preventive developmental work.
	I have listened to what has been said on federation and collaboration. I am yet to be convinced that forces will offer up and operate in a way that will lead to the improvements of the service which we all recognise are critical if we are to tackle big crime and attack local crime. For those reasons, I think that the merger process is essential, although it will lead to some discomfort and be difficult in some force areas. We have embarked on the policy and will continue to consult on it and to listen, but it is essential if we are to develop the modern, effective and efficient police force that the people of our country, concerned as they are with community and public safety, demand for the future. Therefore, interesting though the debate has been and interesting though the points raised are, we are embarking on the right course to establish a modern force fit for purpose.

Company Law Reform Bill [HL]

Further consideration of amendments on Report resumed.
	Clause 445 [Power to amend categories of permitted disclosure]:

Baroness Noakes: moved Amendment No. 277:
	Page 208, line 38, leave out ", (4) and (5)" and insert "and (4)"

Baroness Noakes: My Lords, in moving Amendment No. 277, I shall speak also to the other amendments in the group. Again, we have grouped the similar amendments for the FRRP in Part 15 and the Takeover Panel in Part 22. These amendments concern the powers to extend the disclosure of confidential information to overseas bodies.
	In Clause 445 the Government have taken a power to amend the permitted disclosure categories, which we generally support. Clause 444(5) allows disclosure by the FRRP to non-UK bodies which exercise public functions provided that they carry out similar functions to the FRRP. We have no basic problem with that. But under Clause 445 there is a power to amend Clause 444(5) and the only constraint is that it may not be extended to overseas bodies other than those which exercise functions of a public nature.
	Amendment Nos. 277 and 278 have the effect of removing this power to amend Clause 444(5). We do not believe that the Minister made the case for this power when we debated it in Grand Committee. Why might it be necessary to extend disclosure permissions to further overseas bodies? What kind of bodies?
	It seems that the power can extend to overseas non-public bodies which do not carry out functions similar to the FRRP. Can the Minister explain why? Is it necessary that the public functions of an overseas body are similar to public functions here? We know that the definition of the public sector overseas varies from country to country. I raised that in Grand Committee. Countries such as China and Russia set their boundaries of what is or is not public sector in different places.
	The Minister will see that we are far from convinced of the need for the Government to have this power. Since it involves confidential information leaving the country, we believe that the power raises significant public interest issues. Hence we have also tabled our alternative approach in Amendment No. 279 which requires such an order to be subject to the affirmative rather than the negative procedure.
	Amendments Nos. 455, 456 and 457 are the equivalent amendments in relation to the Takeover Panel. I beg to move.

Lord McKenzie of Luton: My Lords, under Clause 444(5) disclosures may be made to overseas regulatory authorities by the FRRP provided that certain conditions are met. Clause 445 permits the Secretary of State to amend that subsection, subject to certain conditions. Amendments Nos. 277 and 278 would, as has been described, prevent the Secretary of State amending that subsection in any way. I appreciate that these amendments are more restrictive in scope than those tabled by the noble Baroness in Grand Committee, but they could still cause difficulties. Disclosure may currently be made only to an overseas body to enable or assist it to exercise functions of a public nature similar to those of the Financial Reporting Review Panel. These amendments would prevent the Secretary of State adding, for example, any specified categories of body with functions that were different from the panel's other than through primary legislation. I suggest that that would be an undesirable restriction given the global nature of business today where regulators will increasingly need to be able to share information across national boundaries.
	I should emphasise that the Secretary of State's power to make changes to subsection (5) is already limited. As was recommended by the Delegated Powers and Regulatory Reform Committee when the provisions were introduced in the Companies (Audit, Investigations and Community Enterprise) Act 2004, there is a restriction in Clause 445(2)(c) such that disclosure can be made only to a body that exercises functions of a public nature. In Grand Committee, the noble Baroness expressed concerns that this restriction was not tight enough—indeed, that has been reiterated tonight—because it would not prevent the Secretary of State deciding at some future date to allow for disclosures to a body exercising functions of a public nature in country X that would not be considered public functions in this country.
	However, any proposal to extend disclosures to an overseas body not exercising public functions that we would recognise would clearly be circumventing the spirit of this restriction. I have to say that it is highly improbable that any Government would want to do so.
	Amendment No. 279 would require an affirmative resolution for the exercise of the power under Clause 445 to amend the types of overseas bodies to which disclosure of information about accounts obtained by the FRRP under compulsory powers is permitted under Clause 444(5). This is an alternative to the other two amendments in this group. The argument is essentially the same as that which I made in Grand Committee. The Delegated Powers and Regulatory Reform Committee has considered this power both during the passage of the Companies (Audit, Investigations and Community Enterprise) Act 2004 and in respect of this Bill and has considered the negative resolution procedure to be appropriate.
	Mirroring amendments are proposed to the disclosure provisions in relation to the Takeover Panel. In that case, we have again followed the blueprint laid down by the Delegated Powers and Regulatory Reform Committee. The gateways list in relation to the Takeover Panel can be amended only by secondary legislation to include non-UK bodies exercising functions of a public nature. I know that the noble Baroness is pressing for some detail, but it is impossible to predict precisely what circumstances may arise. That is why it is important that the power is retained, subject to the negative resolution procedure, as provided for in the Bill.

Baroness Noakes: My Lords, I thank the Minister for that explanation, which, I fear, has not taken us much further forward than the point that we reached in Grand Committee.
	The Minister said that to allow information to be disclosed to overseas bodies not similar to a public nature in the UK would contravene the spirit of the Act. I have never known the spirit of Acts acting as a practical restraint when power came to be used. There is no jurisprudence on the spirit of legislation, as far as I understand it. The Minister has said again that he cannot predict how the power could be used and invites us merely to rest on the negative procedure, which is the weakest.
	There are various issues about the disclosure of information that we will want to clarify with the Minister between now and Third Reading. I must say that we are not entirely happy; but that is not the only area in which we are not entirely happy about the clauses. I seek further clarification, but, in the mean time, I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendments Nos. 278 and 279 not moved.]

Baroness Noakes: moved Amendment No. 280:
	After Clause 445, insert the following new clause—
	"DATA PROTECTION, ETC
	Nothing in sections 442 to 445 authorises the making of a disclosure which—
	(a) contravenes the Data Protection Act 1998 (c. 29), or
	(b) is prohibited by Part 1 of the Regulation of Investigatory Powers Act 2000 (c. 23)."

Baroness Noakes: My Lords, I very much hope that the Minister will agree with the amendment. He is clearly very happy about it, so I am full of hope. Amendment No. 280 inserts a new clause after Clause 445. That ensures that nothing in the information disclosure provisions of Clauses 442 to 445 infringes either the Data Protection Act 1998 or Part 1 of the Regulation of Investigatory Powers Act 2000.
	I note with pleasure that Clause 630(9) contains a similar reference to the Data Protection Act in relation to the Takeover Panel. To that extent, my amendment achieves consistency in the Bill. I then referred back to the Act to which I have already referred today, which is the Commissioners for Revenue and Customs Act 2005. Section 22 of that Act is drafted in precisely the terms of my amendment. The importance of the amendment is that it makes clear that the Bill in no way changes the obligations and rights that exist under the Data Protection Act and the Regulation of Investigatory Powers Act.
	I hope that the Minister will want to ensure that there is complete consistency and clarity within the Bill. To refer to the Act in one place and not another raises questions about the information disclosure provisions in one part of the Bill as compared to another. I hope that the Minister will accept that the amendment is important and that we must not leave any chink to allow an argument that the protections of those Acts, which are important, are in any way diminished by the Bill.
	I should also say that I have resisted the temptation to gold-plate the amendment, as some would prefer, by also importing references to the Human Rights Act. However, I must say that similar issues arise. I hope that the Minister agrees with our amendment and that he will want to perfect the drafting of Clause 630 on Third Reading. I beg to move.

Lord McKenzie of Luton: My Lords, we have some sympathy with the first part of the new clause tabled by the noble Baroness, which makes specific reference to the Data Protection Act. As she has identified, there is a similar reference in Clause 639. We would certainly be happy to consider that. We may have some difficulty with the second part. There is nothing in the clause to authorise disclosure in contravention of that Act, so we are not sure that such a provision is necessary. However, because we need to consider the first part, we should agree to consider the whole of the amendment and reflect again before Third Reading.

Baroness Noakes: My Lords, I am grateful to the Minister. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 447 [Reporting standards]:

Baroness Noakes: moved Amendment No. 281:
	Leave out Clause 447.
	On Question, amendment agreed to.

Lord McKenzie of Luton: moved Amendment No. 282:
	After Clause 450, insert the following new clause—
	"GENERAL POWER TO MAKE FURTHER PROVISION ABOUT ACCOUNTS AND REPORTS
	(1) The Secretary of State may make provision by regulations about—
	(a) the accounts and reports that companies are required to prepare;
	(b) the categories of companies required to prepare accounts and reports of any description;
	(c) the form and content of the accounts and reports that companies are required to prepare;
	(d) the obligations of companies and others as regards—
	(i) the approval of accounts and reports,
	(ii) the sending of accounts and reports to members and others,
	(iii) the laying of accounts and reports before the company in general meeting,
	(iv) the delivery of copies of accounts and reports to the registrar, and
	(v) the publication of accounts and reports.
	(2) The regulations may amend this Part by adding, altering or repealing provisions.
	(3) But they must not amend (other than consequentially)—
	(a) section 371 (accounts to give true and fair view), or
	(b) the provisions of Chapter 12 (revision of defective accounts and reports).
	(4) The regulations may create criminal offences in cases corresponding to those in which an offence is created by an existing provision of this Part.
	The maximum penalty for any such offence may not be greater than is provided in relation to an offence under the existing provision.
	(5) The regulations may provide for civil penalties in circumstances corresponding to those within section 436(1) (civil penalty for failure to file accounts and reports).
	The provisions of section 436(2) to (5) apply in relation to any such penalty."

Lord McKenzie of Luton: My Lords, in moving this amendment I shall speak also to Amendments Nos. 285 and 303. Those amendments are required as a consequence of the removal of the general company law reform power previously contained in Part 31 of the Bill. Among other things, the general power had been intended to replace Section 257 of the Companies Act 1985, which currently contains a wide power for the Secretary of State to modify any of the provisions on accounts, reports and audits by regulations.
	Section 257 has been in companies legislation in its present form since the Companies Act 1989. It has been used to implement EC accounting directives—for example, to insert Schedules 9 and 9A to the 1985 Act relating to the accounts of banks and insurance companies. It was the means whereby small companies gained exemptions from audit.
	There is no equivalent to Section 257 of the 1985 Act in the Bill; rather, a number of targeted powers are provided for in Part 15 to enable the form and content of accounts and reports to be prescribed by regulations made by the Secretary of State. This is in line with the recommendations of the Company Law Review, and recognises the fact that, given the technical content and evolving nature of the form and content of accounts and reports, it is more appropriate that they be specified in secondary legislation.
	In the absence of the general reform power and a provision equivalent to Section 257, the substantive provisions in Part 15 could be modified only by using Section 2(2) of the European Communities Act 1972, where required by EC law. Following the decision to remove the general reform power, we consider that we shall need delegated powers to modify the provisions of Part 15 in the following specific areas as reflected in Amendment No. 282: the accounts and reports that companies are required to prepare; the categories of companies required to prepare accounts and reports; the form and content of accounts and reports; and provisions on the approval, circulation, laying, delivery and publication of accounts and reports. All these matters are encompassed by the existing Section 257.
	Subsection (3) of the proposed new power expressly excludes two provisions from its ambit other than for the purpose of consequential amendment as a result of other amendments to the part. These provisions are Clause 371, headed, "Accounts to give true and fair view" because of its overarching nature, and the provisions on the revision of defective accounts and reports in Chapter 12 of Part 15.
	Amendment No. 285 is consequential on Amendment No. 282.
	On Amendment No. 303, without the general reform power and Section 257, we need a power to be able to modify the substantive provisions in Chapter 1 of Part 16. Again, these are provisions that could have been amended by Section 257. The requirements for audit in that chapter are a balance between the costs of audit and the benefit of audited accounts for members and the wider economy. This is an area where we will want to try to improve the balance from time to time, particularly where there may be opportunities for deregulation. It is therefore important to be able to make changes by regulation rather than needing to introduce new primary legislation whenever we want to change the rules or raise the thresholds. I beg to move.

On Question, amendment agreed to.
	Clause 453 [Meaning of "annual accounts" and related expressions]:

Lord Sainsbury of Turville: moved Amendment No. 283:
	Page 213, line 31, leave out from beginning to second "and"
	On Question, amendment agreed to.
	Clause 455 [Parliamentary procedure for certain regulations under this Part]:

Lord Sainsbury of Turville: moved Amendments Nos. 284 to 285:
	Page 214, leave out line 12.
	Page 214, line 16, at end insert—
	section (General power to make further provision about accounts and reports)."
	On Question, amendments agreed to.
	Clause 457 [Requirement for audited accounts]:

Baroness Noakes: moved Amendment No. 286:
	Page 215, line 42, leave out paragraph (b).

Baroness Noakes: My Lords, in moving Amendment No. 286, I shall also speak to the other amendments in this group. They concern the special provisions in the Bill to allow public-sector non-profit making companies not to be subject to the ordinary audit requirements that apply to all other companies, whether profit-making or not.
	I have observed over the years that if there are two ways to achieve a policy objective in the public sector, and one is complicated and the other is straightforward, there is a tendency for the public sector to opt for the complicated solution. That is what has happened in the Bill. When the noble Lord, Lord Sharman, produced his report on public-sector audit a few years ago, he recommended that the Auditors General, who cannot meet the requirements for Companies Act auditors at present, should be able to carry out the audits of public-sector companies. We fully agree with that, and there are provisions in Part 32 to achieve that objective.
	We expected to find something along the lines of Part 32 in the Bill, and we were surprised to find that the Government had also invented a new category of company—the public-sector non-profit making company—which would not need a normal Companies Act audit. Under the eighth directive, the Government would be fully entitled to remove all non-profit making companies from the audit requirements of the directive, but they have chosen not to do that, and we support them in that. But we do not support them in creating two classes of public-sector company. I do not believe that anyone reading the report of the noble Lord, Lord Sharman, would have concluded that he intended the creation of a two-tier audit rating for the public sector. He is in his place, so perhaps he will be able to confirm that.
	If the Bill is passed, the Comptroller and Auditor General will be carrying out two different types of audit. The Comptroller and Auditor General's audits of profit-making companies will be subject to the full regime of oversight and supervision contained in Part 32. There will be no such regime for the non-profit making companies. In case noble Lords think that this is a distinction without a difference, and that an audit is an audit however it is carried out, I shall read an extract from the helpful letter of 26 April, which the noble Lord, Lord Sainsbury, sent me following our debates in Grand Committee. In the letter, he says:
	"The NAO is already preparing to bring their skills up to speed with current practice so that the C&AG can be ready to take on his new responsibilities"—
	that is, for audits under the Part 32 regime—"promptly and efficiently". As we would expect, this emphasises that the NAO's existing regime is not operating at that standard at the moment, so would not pass muster under Part 32. The implication is that that will remain the case for audits of the new non-profit making public-sector companies that do not come under Part 32.
	We must not let this Bill create a two-tier audit for companies which happen to find themselves in the public sector. My amendments remove the lower tier for non-profit making companies so that all such companies will be audited to the full standards that we expect for companies in this country. I beg to move.

Lord Sharman: My Lords, I support the noble Baroness in these amendments. She asked me to confirm that my report did not envisage the creation of a two-tier structure. I can confirm that most assuredly. Nothing was further from our minds at the time. We thought that a company is a company is a company. We were persuaded that the C&AG should be able to audit companies.
	I shall have to be careful in my choice of words. I was going to say that this is a cynical attempt to get around the implementation of what I recommended. I do not see how you can have two types of company. A company's objective may not be profit-making, but that is irrelevant: it is a company; that is the important thing. Our corporate legislation has always been, not about the company's objectives, but about responding to the limitation of liability by audit and public reporting. That is what company law is about. It is not about whether you choose to incorporate a company to do A, B or C. If you incorporate, you limit liability. Therefore, you are bound by certain rules and regulations which you must adhere to, one of which is to audit within a corporate regime.

Lord McKenzie of Luton: My Lords, first, I shall respond to objections to there being two processes for the two different sorts of companies. I thought that one of the amendments carried earlier was about having one regime for charities which are companies and another regime for companies which are not charities. In a sense, there is a precedent which the House today has recognised. In response to the report of the noble Lord, Lord Sharman, the Government agreed that the Comptroller and Auditor General and his equivalents should have power to audit all non-departmental public bodies, including those in a corporate form. That is our starting point to this debate. Company audits are, however, subject to EC law, in particular the requirements of the eighth company law directive on auditing.
	Under Article 48 of the EC treaty, which provides the legal basis for an exemption from the company law directives for non-profit-making companies, it is open to member states to exclude non-profit-making companies from domestic company legislation. As the noble Baroness has suggested, the Government could make all corporate NDPBs subject to statutory audit under the Bill for consistency's sake. That is one proposition. However, the Government believe that that is not a good enough policy reason to gold-plate Community obligations. It is right that non-profit-making NDPBs should be able to make use of the EC treaty derogation in the same way as the UK allows small companies to be exempt from these requirements. Non-profit-making NDPBs will still be subject to the rigorous C&AG financial audit and parliamentary accountability.
	I hope that that response to the noble Baroness has helped to explain the reasoning behind the provisions related to ensuring that the Comptroller and Auditor General and his equivalents become eligible to audit NDPB companies and their equivalents. I hope that that has persuaded noble Lords to accept that the clauses remain part of the Bill.
	In addition to the desire not to gold-plate where there is no valid policy justification, exempting non-profit-making NDPBs from the statutory auditor provisions will also address the anomaly arising from the fact that government departments are subject to the C&AG's financial audits where a government department that set up a corporate vehicle for non-trading purposes is subject to the Companies Act regime. The Government believe that there is no policy reason to justify this different treatment. Of course, where government-controlled companies are trading commercially and might be considered profit making, they should—and will, under the Bill—be subject to a statutory audit.
	It might be helpful if I explain some of the Government's thinking behind the provisions in Parts 16 and 32 that are designed to permit the Comptroller and Auditor General, and his equivalents, to audit certain companies in the central government sector.
	It was in response to the report of the noble Lord, Lord Sharman, that the Government agreed that the Comptroller and Auditor General and his equivalent should have power to audit all non-departmental public bodies, including any in corporate form and any companies that they own. However, the commitment is not straightforward to implement. One reason is that there is no legally valid definition of an NDPB, hence the Government proposed the process under the Government Resources and Accounts Act 2000, under which new NDPBs that the Comptroller and Auditor General should audit are listed one by one.
	Another consideration was the requirement in the EU eighth directive that auditors of corporate entities should be recognised as qualified by a competent authority. The provisions in the Bill are an honest attempt to find a way in which the Comptroller and Auditor General can be given that power without falling foul of the EU eighth directive.
	On the mechanics of the Bill, noble Lords are familiar with the device in Part 32 that makes the Comptroller and Auditor General and his equivalents in the devolved administrations eligible to audit any company. This was unavoidable because of the undefined nature of NDPBs. However, the Comptroller and Auditor General and his equivalents have agreed to seek to use this power only to audit corporate NDPBs and any corporate bodies they own, thus closing the power down just to the field required by the Government's commitment in response to the report by the noble Lord, Lord Sharman. Copies of letters that set out these commitments have already been placed in the Library. I can assure the noble Baroness, Lady Noakes, that the provisions in the Bill do not represent some unreasonable extension of the Comptroller and Auditor General's power.
	I note the noble Baroness's concerns about the different treatment and separate provisions accorded to profit-making and non-profit-making companies. But the short answer is that under the directive, profit-making companies retain the power to appoint an auditor other than the Comptroller and Auditor General, though of course the Government expect that in practice they will appoint the appropriate auditor general.
	Taking advantage of the exemption in the treaty using the process of an order under the Government Resources and Accounts Act provides a one-off legal process for each NDPB. A Comptroller and Auditor General audit of NDPB non-profit-making companies could thereafter only be overturned with Parliament's approval.
	I hope that that response has helped to explain why the Government have done what they did. They have acted in good faith to try to address the recommendations in the report of the noble Lord, Lord Sharman. I hope that that has explained why we have these arrangements.

Baroness Noakes: My Lords, methinks the Minister doth protest too much. We were treated to a long explanation of Part 32 and why it was justified but I did not challenge Part 32 in my opening remarks. Indeed, the Minister will not find an amendment on the Marshalled List that seeks to reopen the issues on Part 32 that we debated in Grand Committee. I was convinced by the discussion in Grand Committee and the subsequent letter from the noble Lord, Lord Sainsbury, that the Part 32 structure, with the side letters from the C&AG, was appropriate. I am merely seeking to make sure that that is applied consistently across the public sector without any unnecessary deviation.
	The Minister has raised a lot of points that we will have to think about but I am not convinced of the need for this two-tier approach for public sector companies. It is still cumbersome and unnecessary. I hope the Minister will reflect further on it, as we will, before Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 459 [Small companies: conditions for exemption from audit]:

Lord Hodgson of Astley Abbotts: moved Amendment No. 287:
	Page 216, line 27, leave out "meets the following conditions" and insert "qualifies as a small company pursuant to section 360"

Lord Hodgson of Astley Abbotts: My Lords, I shall speak also to Amendments Nos. 288, 291, 292 and 294. These concern Clauses 459 and 464. I am extremely grateful to the noble Lords, Lord Sharman and Lord Razzall, for attaching their names to this group.
	We now come to the second part of my concern about independent charity examiners: the thresholds at which charities will be able to take advantage of these specialist procedures.
	As I have said before, at present charitable companies with an income of between £90,000 and £250,000 per annum are required to have a report drawn up by a reporting accountant. However, this regime was not designed specifically with charities in mind and lasted for only a short time in relation to small companies in general. Therefore its continued application in the Bill to charitable companies is quite anomalous.
	I note that the Government have tabled Amendments Nos. 290 and 293 in this group, which appear to travel in the same direction. Perhaps I may outline briefly our approach on these. Instead of tying this Bill hard and fast to definite figures, as the Government appear to wish to do, we have cross-referred to the appropriate places in charities statute—following the stricture of the noble Lord, Lord McKenzie, that charity issues should be decided in a charity forum. For example, where the Government have chosen to insert "£500,000" in Clause 464, we refer instead to,
	"section 43(1) of the Charities Act 1993",
	which is where this figure originates from.
	Our hope is that by doing this we avoid the inflexibility of having a figure in primary company legislation, which, as noble Lords opposite are inclined to argue, is extremely difficult to keep up to date. Indeed, trying to keep this up to date in two pieces of primary legislation will be even more difficult. I expect per contra that on this occasion the noble Lord, Lord McKenzie, will argue that it is better to err on the side of clarity in the Bill. However, given the 20-year gap between this Bill and its main predecessor, the Companies Act 1985, we remain to be convinced that this really is the best approach. I do not think that we are far from an accord on this point, but I hope that the Government will be able to give us some additional assurance. I beg to move.

Lord Sharman: My Lords, as the noble Lord, Lord Hodgson, has said, my name and that of my noble friend Lord Razzall are attached to these amendments. We support them for the reasons outlined by the noble Lord at the beginning of his remarks: we believe that it is much better to key this in to the Charities Bill with its criteria and definitions than to leave it here by itself. I support the amendments and I hope that the Government will give them favourable consideration.

Lord McKenzie of Luton: My Lords, as I indicated when we debated the other amendment in the name of the noble Lord, Lord Hodgson, on the audit of charitable companies, we are going to consider removing small charitable companies from requirements in the Companies Acts to have audits, leaving their audit regime to charity law—even more so in the light of the earlier decision of this House on Amendment No. 223. In the mean time, the two government amendments, Amendments Nos. 290 and 293, simply bring the thresholds for charitable companies into line with the thresholds in the Charities Bill currently before Parliament.
	Notwithstanding the earlier decision on reporting accountants, I do not believe it would be appropriate to change these thresholds in the way proposed in the noble Lord's amendment. The government amendments would bring them into line with the thresholds in the Charities Bill. To go any further at this stage and in this way risks creating confusion. Nevertheless, we agree to consider whether, and if so how, to bring the audit requirements for small charitable companies into line with those applying to unincorporated charities.

Lord Hodgson of Astley Abbotts: My Lords, I am grateful to the Minister. His response is a half loaf, and perhaps a generous half. For the reasons given by the noble Lord, Lord Sharman, we would prefer to get the correlation and co-ordination done at this stage. But at five past nine I am inclined to take half a loaf off the table and retire happily to the Bench. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendments Nos. 288 and 289 not moved.]
	Clause 464 [Small charities: accountant's report in lieu of audit]:

Lord Lyell: My Lords, I should advise your Lordships that if Amendment No. 290 is agreed to, I shall not be able to call Amendment No. 291 by reason of pre-emption.

Lord Sainsbury of Turville: moved Amendment No. 290:
	Page 219, line 28, leave out "£1.4 million" and insert "£2.8 million"
	On Question, amendment agreed to.
	[Amendment No. 292 not moved.]

Lord Sainsbury of Turville: moved Amendment No. 293:
	Page 219, line 35, leave out "£250,000" and insert "£500,000"
	On Question, amendment agreed to.
	[Amendment No. 294 not moved.]
	Clause 467 [The accountant's report]:

Lord Sainsbury of Turville: moved Amendment No. 295:
	Leave out Clause 467 and insert the following new Clause—
	"THE INDEPENDENT EXAMINER'S REPORT
	(1) The report required for the purposes of section 464 (small charities: independent examiner's report in lieu of audit) is a report that is—
	(a) prepared by a person (the "independent examiner") who meets the requirements of section 468, and
	(b) complies with the provisions under subsections (2) and (3).
	(2) In the case of a company registered in England and Wales or Northern Ireland, the report must comply with the requirements for independent examination of a charity's accounts under section 44(1)(c) of the Charities Act 1993 (c. 10).
	(3) In the case of a company registered in Scotland, the report must comply with such requirements for independent examination of a charity's accounts as may be specified by regulations made under section 44(4)(g) of the Charities and Trustee Investment (Scotland) Act 2005 (asp 10)."
	On Question, amendment agreed to.
	Clause 468 [The reporting accountant]:

Lord Sainsbury of Turville: moved Amendment No. 296:
	Leave out Clause 468 and insert the following new Clause—
	"THE INDEPENDENT EXAMINER
	(1) In the case of a company registered in England and Wales or Northern Ireland, the independent examiner must be a person meeting the requirements of section 43(a) of the Charities Act 1993 (c. 10).
	(2) In the case of a company registered in Scotland, the independent examiner must be a person meeting such requirements for an independent examiner of a charity's accounts as may be specified by regulations made under section 44(4)(g) of the Charities and Trustee Investment (Scotland) Act 2005 (asp 10)."
	On Question, amendment agreed to.
	Clause 469 [Effect of appointment of a partnership]:

Lord Sainsbury of Turville: moved Amendment No. 297:
	Leave out Clause 469.
	On Question, amendment agreed to.
	Clause 470 [Independence requirement]:

Lord Sainsbury of Turville: moved Amendment No. 298:
	Leave out Clause 470.
	On Question, amendment agreed to.
	Clause 471 [Meaning of "associate"]:

Lord Sainsbury of Turville: moved Amendment No. 299:
	Leave out Clause 471.
	On Question, amendment agreed to.
	Clause 472 [Rights of reporting accountant]:

Lord Sainsbury of Turville: moved Amendment No. 300:
	Page 224, line 32, leave out "reporting accountant" and insert "independent examiner"
	On Question, amendment agreed to.
	Clause 473 [Non-profit-making companies subject to public sector audit]:
	[Amendment No. 301 not moved.]
	Clause 474 [Scottish public sector companies: audit by Auditor General for Scotland]:
	[Amendment No. 302 not moved.]

Lord McKenzie of Luton: moved Amendment No. 303:
	After Clause 474, insert the following new clause—
	"GENERAL POWER OF AMENDMENT BY REGULATIONS
	(1) The Secretary of State may by regulations amend this Chapter by adding, altering or repealing provisions.
	(2) The regulations may make consequential amendments or repeals in other provisions of this Act, or in other enactments.
	(3) Regulations under this section imposing new requirements, or rendering existing requirements more onerous, are subject to affirmative resolution procedure.
	(4) Other regulations under this section are subject to negative resolution procedure."
	On Question, amendment agreed to.
	Clause 475 [Appointment of auditors of private company: general]:

Lord McKenzie of Luton: moved Amendment No. 304:
	Leave out Clause 475.

Lord McKenzie of Luton: My Lords, in moving Amendment No. 304, I shall speak also to Amendments Nos. 305 to 311 and 502. These are technical amendments to clarify the way in which companies, private and public, are to appoint their auditors. In particular, they now explicitly provide for the method of appointment of a company's first auditors. The need for some improvement was clear from our debates in Grand Committee and I am grateful to the noble Lords who then put forward probing amendments demonstrating this. The lack of any explanation of how a company was to appoint its first auditor was unhelpful and we have now remedied this.
	We have also taken the opportunity to recast the rules so that the basic requirement is that a company appoints an auditor in relation to each financial year for which its accounts will have to be audited, followed by specific provisions about the time by which the auditor must be appointed and about the times when appointment is to be by the directors and the members.
	In particular, it is now clear from subsection (3)(a) in Amendment No. 305 that it is for the directors of a private company to appoint first auditors by the time that they send out the company's first set of accounts, and from subsection (3)(a) in Amendment No. 309 that it is for the directors of a public company to appoint first auditors before the company's first accounts meeting. It is also now clear from the final sentence of subsection (5) in Amendment No. 305 that appointment of private company auditors is without prejudice to deemed reappointment.
	I hope that noble Lords will agree that the new provisions are easier to follow than those they replace. I beg to move.

On Question, amendment agreed to.

Lord McKenzie of Luton: moved Amendment No. 305:
	After Clause 475, insert the following new clause—
	"APPOINTMENT OF AUDITORS OF PRIVATE COMPANY: GENERAL
	(1) An auditor or auditors of a private company must be appointed for each financial year of the company, unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required.
	(2) For each financial year for which an auditor or auditors is or are to be appointed (other than the company's first financial year), the appointment must be made before the end of the period of 28 days beginning with—
	(a) the end of the time allowed for sending out copies of the company's annual accounts and reports for the previous financial year (see section 405), or
	(b) if earlier, the day on which copies of the company's annual accounts and reports for the previous financial year are sent out under section 404.
	This is the "period for appointing auditors".
	(3) The directors may appoint an auditor or auditors of the company—
	(a) at any time before the company's first period for appointing auditors,
	(b) following a period during which the company (being exempt from audit) did not have any auditor, at any time before the company's next period for appointing auditors, or
	(c) to fill a casual vacancy in the office of auditor.
	(4) The members may appoint an auditor or auditors by ordinary resolution—
	(a) during a period for appointing auditors,
	(b) if the company should have appointed an auditor or auditors during a period for appointing auditors but failed to do so, or
	(c) where the directors had power to appoint under subsection (3) but have failed to make an appointment.
	(5) An auditor or auditors of a private company may only be appointed—
	(a) in accordance with this section, or
	(b) in accordance with section 476 (default power of Secretary of State).
	This is without prejudice to any deemed re-appointment under section 478."
	On Question, amendment agreed to.
	Clause 476 [Appointment of auditors of private company: default power of Secretary of State]:

Lord McKenzie of Luton: moved Amendments Nos. 306 and 307:
	Page 226, line 29, leave out "475(1)" and insert "(Appointment of auditors of private company: general)"
	Page 226, line 31, leave out subsection (2) and insert—
	"(2) Where subsection (2) of that section applies and the company fails to make the necessary appointment before the end of the period for appointing auditors, the company must within one week of the end of that period give notice to the Secretary of State of his power having become exercisable."
	On Question, amendments agreed to.
	Clause 477 [Period for appointing auditors]:

Lord McKenzie of Luton: moved Amendment No. 308:
	Leave out Clause 477.
	On Question, amendment agreed to.
	Clause 480 [Appointment of auditors of public company: general]:

Lord McKenzie of Luton: moved Amendment No. 309:
	Page 228, line 3, leave out subsections (1) to (3) and insert—
	"(1) An auditor or auditors of a public company must be appointed for each financial year of the company, unless the directors reasonably resolve otherwise on the ground that audited accounts are unlikely to be required.
	(2) For each financial year for which an auditor or auditors is or are to be appointed (other than the company's first financial year), the appointment must be made before the end of the accounts meeting of the company at which the company's annual accounts and reports for the previous financial year are laid.
	(3) The directors may appoint an auditor or auditors of the company—
	(a) at any time before the company's first accounts meeting;
	(b) following a period during which the company (being exempt from audit) did not have any auditor, at any time before the company's next accounts meeting;
	(c) to fill a casual vacancy in the office of auditor.
	(4) The members may appoint an auditor or auditors by ordinary resolution—
	(a) at an accounts meeting;
	(b) if the company should have appointed an auditor or auditors at an accounts meeting but failed to do so;
	(c) where the directors had power to appoint under subsection (3) but have failed to make an appointment."
	On Question, amendment agreed to.
	Clause 481 [Appointment of auditors of public company: default power of Secretary of State]:

Lord McKenzie of Luton: moved Amendments Nos. 310 and 311:
	Page 228, line 27, leave out "480(1)" and insert "480"
	Page 228, line 29, leave out subsection (2) and insert—
	"(2) Where subsection (2) of that section applies and the company fails to make the necessary appointment before the end of the accounts meeting, the company must within one week of the end of that meeting give notice to the Secretary of State of his power having become exercisable."
	On Question, amendments agreed to.
	Clause 484 [Disclosure of terms of audit appointment]:

Baroness Noakes: moved Amendment No. 312:
	Page 229, line 40, leave out "negative" and insert "affirmative"

Baroness Noakes: My Lords, in moving Amendment No. 312, I shall speak also to Amendment No. 313. Amendment No. 312 seeks to make the power contained in Clause 484 subject to the affirmative rather than the negative procedure. Amendment No. 313 seeks to remove Clause 484 and its power completely.
	Clause 484 is part of the Government's restless desire to take control over every minute aspect of corporate life. It seems innocuous enough—let us disclose the terms on which the auditors are appointed, remunerated and carry out their duties—but this proposal has no firm policy foundation, is not sought by shareholders and a perfectly good mechanism already exists which could achieve its aims if it was ever thought desirable.
	I think the auditors themselves may have initially floated this idea of publishing their terms of appointment—probably in the confused post-Enron environment—but I cannot recall ever hearing shareholders saying, "I need to see the auditors' terms of reference". But the idea somehow got into the public domain and it has been considered seriously by the Financial Reporting Council, which has been given the responsibility by the Government to develop and oversee corporate governance in the UK. As the Minister is aware, the FRC duly consulted on this late last year and found very little appetite for it. Accordingly, it proposes not to amend the combined code at present. But the important point is that the FRC can do so in future if ever demand arose to see the auditors' terms of appointment, or if the FRC thought it would be beneficial.
	The Minister in Grand Committee reported that there was widespread support for this power when consultation was carried out. But that was some time ago and the FRC's consultation is much more recent and relevant.
	As the chairman and a member of a number of audit committees, I am obliged to look at these documents. They are turgid. They are drafted by the auditors' lawyers, vetted by the companies' lawyers, and I can honestly say that I have never found anything useful in them. As the noble Lord, Lord Sharman, pointed out in Grand Committee, since audits are prescribed by statute, they tend to be concerned with liability rather than the content of the audit.
	I do not believe that the Government have made a case for having this power. The FRC exists and could do this job perfectly well if ever there was a necessity or reason for so doing. But if the Government manage to persuade us that they should have yet another power to interfere, we agree with the CBI that at the very minimum, this should be subject to the affirmative procedure. I beg to move.

Lord Sharman: My Lords, I support the noble Baroness, Lady Noakes. The provision is surplus to requirements, as she has quite rightly said. The statute requires the appointment of an auditor and the basis on which he reports. It has long been a tenet of our corporate law that that is a requirement. We do not have to have separate disclosure of the terms of appointment. All you will get is disclosure of a contract which tells you more about what the auditors are not doing than what they are doing, and I challenge any shareholder to interpret it. It is quite otiose to suggest that this provision is needed.

Lord McKenzie of Luton: My Lords, Clause 484 is one of a small number of new provisions, despite the protestations, relating to the appointment of auditors. It provides a power to require companies to disclose the terms on which a company engages its auditors.
	We heard a number of arguments against this provision in Grand Committee, but I do not believe that any of them are wholly compelling. The auditors' central role is to provide assurance to the members of the company about the directors' stewardship. Published audit accounts also provide vital information for third parties so that markets can work well. I can see no good reason, other than cost, for not giving those members and third parties access to the audit engagement letter.

Lord Sharman: My Lords, if I provided the Minister with a copy of a letter of engagement, in confidence, would he agree to reconsider this? One needs to have first-hand experience of what is in these letters. I am quite happy to provide, in confidence, a real-life example.

Lord McKenzie of Luton: My Lords, I would be very happy to receive a copy. I have looked at these things in the distant past, but I am sure that matters have changed since then.

Lord Sharman: My Lords, I am grateful to the Minister for giving way again. I think the phrase "in the distant past" is the key.

Baroness Noakes: Absolutely.

Lord Sharman: My Lords, with the greatest respect—which, as my noble friend Lord Razzall, says, means, "I am not going to listen to you"—developments over the past three or four years have been quite astonishing. For that reason, I encourage the Minister to look at this.

Lord McKenzie of Luton: My Lords, the Government's proposition does not rest on my experience of these matters. The people who are addressing it are considerably more up to date than I am. But I see no good reason, other than cost, for not giving those members and third parties access to the audit engagement letter. It might, as has been suggested, be a very dull and turgid document that few shareholders would choose to read, but should they not have the opportunity? Only yesterday, the noble Lord, Lord Hodgson, was arguing vehemently for shareholder democracy. In Grand Committee, the noble Lord, Lord Sharman, said that engagement letters would tell you more about what the auditors are not going to do than what they are going to do, a point he has just reiterated. That is information to which investors should have access.

Lord Hodgson of Astley Abbotts: My Lords, I am sorry the Minister is having such a difficult time, but the noble Lord, Lord Sharman, is right. He will provide the Minister with an example of a letter of engagement—I see some, too. Anybody who is faced with these pages of text will garner nothing from them at all. This has nothing to do with shareholder democracy; it is about bureaucracy and red tape to achieve nothing. The Minister should not try to link this to the nominee issue; it is a quite different issue.

Lord McKenzie of Luton: My Lords, it is unfortunate that the noble Lord should speak for all shareholders in that way. Some shareholders may wish to access these documents and find them interesting—most may not—but the provision is about giving them the opportunity. I can understand that auditors and directors who at present do not have to think about others reading the letter may have some reservations, but they should not do so. I cannot see any issue of commercial confidentiality between the directors and the auditors. After all, it is on behalf of the members and not of the directors that the audit is conducted. We would not want to impose unreasonable costs on companies in pursuit of this transparency, and we would consider this very carefully before making any order under this clause. We would be unlikely to apply it to small companies, where the benefits would be fewer and the costs could well be greater, certainly in proportion to the scale of the business. However, for large, quoted companies, there will have been an electronic version of the engagement letter on a website. The cost is minimal.
	I ask noble Lords to agree in principle that we should be able to require the disclosure of audit engagement letters when the benefits outweigh the costs. If we agree that principle, it is entirely appropriate that the details should in practice be decided by secondary legislation, subject to negative resolution.
	This justification for the procedure was included in our memorandum to the Delegated Powers Committee, which accepted it. I can understand that there may be opposition to this new transparency, particularly from auditors and some of their client companies, but we are not proposing it for their benefit. It is the shareholders and investors on whose behalf the audit is being conducted who stand to benefit. However, I look forward to receiving the noble Lord's copy of the engagement letter and will study it diligently.

Baroness Noakes: My Lords, this debate has demonstrated that the Minister and possibly even his officials have not seen up-to-date examples of letters of engagement. They have changed hugely since I left the profession; I now see them on the other side of the fence. As an audit committee member or chair, one is obliged to read letters of engagement because one is obliged by corporate governance rules to approve them. There should be no requirement for anybody else to go through that.
	The Minister said that he had not heard any arguments against the power. He is approaching it the wrong way around: it is for the Government to make a case for taking this power, especially given that, for quoted companies, there is a perfectly good power in the case of the FRC. The gap between the government side of the House and this side of the House is so great that we need to explore why it exists. When the noble Lord, Lord Sharman, provides an up-to-date example of a letter of appointment, I hope that the Minister will see that the Government are in error and that they may want to return to the matter at Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendment No. 313 not moved.]
	Clause 486 [Auditor's report on company's annual accounts]:

Lord McKenzie of Luton: moved Amendment No. 314:
	Page 231, line 32, at end insert—
	"Expressions used in this subsection that are defined for the purposes of Part 15 (see section 456) have the same meaning as in that Part."

Lord McKenzie of Luton: My Lords, in moving the amendment, I shall speak also to Amendments Nos. 395 and 503. These are minor technical amendments which will apply the definition of "profit and loss account" in Part 15 to Clause 486(3), instead of the whole of Part 16 having a separate definition of the term. Such a separate definition is unnecessary because the expression is used in only one subsection of Part 16. I beg to move.

On Question, amendment agreed to.
	Clause 487 [Auditor's report on directors' report]:
	[Amendment No. 314A not moved.]
	Clause 488 [Auditor's report on operating and financial review]:

Baroness Noakes: moved Amendment No. 315:
	Leave out Clause 488.
	On Question, amendment agreed to.
	Clause 490 [Duties of auditor]:

Baroness Noakes: moved Amendment No. 316:
	Page 232, line 24, leave out "proper" and insert "adequate"

Baroness Noakes: My Lords, in moving Amendment No. 316, I shall also speak to Amendments Nos. 318 and 320, which are in my name in this group. I am delighted to see that the Minister's name has been added to two of the amendments. I support Amendments Nos. 317 and 319 in the Minister's name alone. There is just one amendment in the group to which the noble Lord has not added his name, and I shall deal with that.
	These amendments align the description of the standard that accounting records should reach between those contained in the duty on directors in Clause 364 and those for the auditor's report by virtue of Clause 490. The term will be standardised as "adequate". Companies Acts in the past had the auditors reporting against a different standard of "proper". We welcome the Government's amendments to bring the wording together.
	I should like to speak to Amendment No. 320, which clearly has not found favour with the Minister. The amendment is chiefly the result of using the same word, "adequate", but I wanted to make sure that the meanings between Clauses 364 and 490 were fully aligned and so tabled Amendment No. 320, which positively states that "adequate accounting records" means the same thing in both places. If the Minister can tell me that the Government believe this is achieved by the other amendments in this group, and that Amendment No. 320 is unnecessary, I shall be content. I beg to move.

Lord McKenzie of Luton: My Lords, I rise to support the noble Baroness on Amendments Nos. 316, and also to speak in support of Amendments Nos. 317 to 319. These are technical improvements, the need for which we accepted when it was pointed out by the noble Baroness, Lady Noakes, in Grand Committee, and we are grateful to her for that.
	The amendments bring the wording of the duty on auditors to look into whether a company has "proper" accounting records into line with Part 15, which places a duty on the company to keep "adequate" accounting records. There is no need to specify that the meaning is the same as in Part 15, and, as there is no need, it is better not to. There is the possibility that making it explicit here might cast doubt on other places where we expect the same words to have the same meaning. I am happy to reassure the noble Baroness that we believe that Amendment No. 320 is unnecessary, and that the matter is already covered by the other amendments.

Baroness Noakes: My Lords, I am happy to accept the three-quarters loaf that I am offered in this case.

On Question, amendment agreed to.

Lord Sainsbury of Turville: moved Amendment No. 317:
	Page 232, line 25, leave out "proper"
	On Question, amendment agreed to.

Baroness Noakes: moved Amendment No. 318:
	Page 232, line 33, leave out first "proper" and insert "adequate"
	On Question, amendment agreed to.

Lord Sainsbury of Turville: moved Amendment No. 319:
	Page 232, line 33, leave out second "proper"
	On Question, amendment agreed to.
	[Amendment No. 320 not moved.]
	Clause 495 [Signature of auditor's report]:

Baroness Noakes: moved Amendment No. 321:
	Page 235, line 17, at end insert "in his own name, for and on behalf of the auditor"

Baroness Noakes: My Lords, I beg to move Amendment No. 321, which amends Clause 495 so that when the senior statutory auditor signs the audit report, as will be required for audits carried out by firms, two things are clear: first, that the statutory auditor signs in his own name, and, secondly, that he signs for and on behalf of the auditor.
	It is a new requirement in this Bill that a senior statutory auditor signs an audit report. When we debated this in Grand Committee, it was clear that the Minister thought Clause 495 would require the senior statutory auditor to sign in his own name. I put it to the Minister that that is not what the clause says. It merely says that the senior statutory auditor should sign it. It does not say what name he should sign.
	When the auditor is a company, the senior statutory auditor would naturally sign it in his own name, because companies do not have signatures. However, that is not true when a partnership is involved. When I was a partner in an auditing firm, I always signed in the name of the firm, rather than my own name, those things that were communications from the firm rather than me as an audit or client service partner. An audit report is a communication from the firm. I suggest to the Minister that without the first leg of my amendment, the most natural thing will be for partners in audit firms to carry on signing the partnership name.
	While I suggest that the Minister does need to look at this drafting, he will be aware that the purpose of tabling the amendment is to ensure that the fact that a senior statutory auditor signs the report is not in any way misunderstood by those reading an audit report. The Institute of Chartered Accountants in England and Wales continues to be concerned that this new requirement will create new misunderstandings about the role and responsibilities of the senior statutory auditor vis-à-vis the audit firm.
	In fact the Bill creates no responsibilities for the senior statutory auditor apart from lifting his pen to sign the audit report. He is not even mentioned in the new auditor offence in Clause 498, to which we shall come in due course. But how is the reader to know that this naming of the statutory auditor is intended to have no legal significance? Furthermore, unless it is clear that the senior statutory auditor signs for and on behalf of the firm, the new signatures may well obscure the fact that an audit opinion is the product of a firm's procedures, and that the opinion is a collective judgment. The senior statutory auditor has a pivotal role in these procedures and in how the collective judgment is reached, but that is all. The judgments at the end of the day are the firm's and not his—and he may not even agree with it if, for example, his own judgment has been overruled by the firm's technical oversight procedures.
	I hope that the Minister will reconsider this area since it causes much concern to the auditors on whom it is being inflicted. I beg to move.

Lord Sharman: My Lords, I support the noble Baroness's amendment. I shall not repeat what she said, but she has it absolutely right. At one time I used to oversee her on these procedures. As noble Lords who have listened to the 14 or 15 days of debate on the Bill will know, we do not always agree. It is very relevant that we should put this matter right.

Lord McKenzie of Luton: My Lords, we started by seeing no need for Amendment No. 321. We would not expect adding the words,
	"in his own name, for and on behalf of"
	to change the effect of Clause 495 in any way. We had understood that the concern was related to some potential change in liability, which we have sought to address in Amendment No. 322.
	If the concern is about the perception of readers of the audit report, I do not really understand it. I do not see what scope there is for confusion. The firm is the auditor of the company and the individual is not. That is clear. If people are confused about that, I do not think that adding words to this clause is likely to make them any less confused. The senior statutory auditor only signs in the firm's name when signing on behalf of the firm. Here he is merely required to sign. Therefore, it follows that he must sign in his own name.
	While I resist the amendment tonight, I promise to reflect further on the wording. If the manner in which the individual must sign is unclear—which I think was the point that the noble Baroness made, certainly in relation to the first part of her amendment—I shall reflect on that but without commitment.

Baroness Noakes: My Lords, I am grateful to the Minister for agreeing to take that away. I hope that he will take away both legs of the amendment. He referred rather dismissively to there being some confusion on the role of the senior statutory auditor and the audit firm. However, I hope that he will reflect on the fact that that confusion is being created by this clause. At the moment there is no confusion, you see just one name on an audit report. In the future you may see two names. There is a huge issue of what new misunderstandings will arise from the audit. That is why the accountancy profession, representing the auditors, remains concerned.
	However, I am glad that the Minister will consider the first leg of the amendment and on that basis I hope that his mind will be directed to its second leg at the same time. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	Clause 496 [Senior statutory auditor]:

Lord McKenzie of Luton: moved Amendment No. 322:
	Page 235, line 29, after "not," insert "by reason of being named or identified as senior statutory auditor or"

Lord McKenzie of Luton: My Lords, in moving Amendment No. 322, I shall speak also to Amendments Nos. 323 and 324. We listened carefully in Grand Committee to arguments put forward about the potential liability of the senior statutory auditor. We cannot but accept that there is a risk that auditors will fear that they may attract extra liability from some aspect of their role as senior statutory auditor, besides signing their name to the audit report. We have tabled Amendment No. 322, which I hope covers the concerns raised. I hope that the noble Baroness will not feel the need to press the other amendments in the group. I beg to move.

Baroness Noakes: My Lords, I am delighted that the Government have addressed this point in Amendment No. 322 in a much more elegant way than was done in my amendments in the group. I am pleased to accept the amendment.

Lord Sharman: My Lords, I add my endorsement of what the noble Baroness has said. I, too, was very concerned in Committee about this, and the Government have responded entirely satisfactorily.

On Question, amendment agreed to.
	[Amendments Nos. 323 and 324 not moved.]
	Clause 497 [Name of auditor etc to be stated in published copies of auditor's report]:

Baroness Noakes: moved Amendment No. 325:
	Page 236, line 11, at end insert—
	"( ) The company shall ensure that any documents which relate to or refer to the resolution, other than the notice of the resolution given to the Secretary of State, and which are or may become publicly available, do not give the name of the audit firm or the senior statutory auditor."

Baroness Noakes: My Lords, I tabled this amendment before realising that the Government intended to restructure Clause 497, which is the effect of Amendments Nos. 326, 327 and 328, to which the Minister has already spoken. I could have retabled this amendment as an amendment to the Government's amendment, but I have left it in as a probing amendment for today's proceedings.
	When we debated Clause 497 in Grand Committee, it was clear that the Government saw the decision not to name the auditor as being taken by the company and not the directors. The noble Lord, Lord McKenzie of Luton, said that it required a resolution of shareholders. I do not understand how a resolution of shareholders can be obtained without disclosing the name of the auditors to each of the shareholders. If that is the case, the aim of confidentiality will potentially be defeated, especially if a terrorist group or similar had purchased a small number of shares precisely to ensure that they got access to as much information as possible. The noble Lord said that he would write to me, but he did not. I have tabled the amendment to clarify the situation. I beg to move.

Lord McKenzie of Luton: My Lords, I apologise for the fact that the noble Baroness has not received a letter from me. I cannot even promise that it is in the post; I would need to check whether it has been drafted. I hope that what I say on this amendment will help.
	Clause 497 puts a duty on a company to include the name of the auditor and, if there is one, the senior statutory auditor in the copy of the audit report that it circulates to its shareholders or otherwise publishes. It also provides an important exception from this duty to deal with the case where there is a risk of violence or intimidation if the names are revealed in this way. There is an important balance of interests here. It is essential that members know whom they are appointing as auditor of the company. The auditor is acting on behalf of the members, helping them to assess the stewardship of the directors. Faced with the real problem of intimidation and violence, it is appropriate to allow companies to keep the information from the wider public, but we cannot prevent the members knowing the identity of the auditor—they must appoint the auditor. It is true that that inevitably limits the value of the exception. It will be of little use to listed companies or other companies whose shares are widely held or traded. Any activist could buy a single share in a listed company and so discover the name of the auditor, even if the auditor's name was to be kept out of the published audit report.
	The provision does nothing special for auditors to prevent anyone, for example a disaffected employee, from disclosing the name of the auditors. There are still risks, and that is unfortunate, but by building an exception into the statutory requirement to disclose the auditor's name we put the auditor on the same footing as every other supplier to the company. The exception would be of value to closely held companies. In such a company, it is right that the members should be able to pass a resolution to take advantage of the exception and that the resolution should state the name of the auditor. There is no reason why this resolution, any more than that the resolution appointing the auditors, should become public knowledge. The protection for companies and their auditors is inevitably not perfect, but I do not believe that the amendment will do anything to improve it.
	I hope that that has explained what we understand to be the position in respect of this conundrum.

Baroness Noakes: Well, my Lords, that has explained that the Government agree with me that there is a problem and that they propose to do nothing about it, which will disappoint those—

Lord McKenzie of Luton: My Lords, I did not say that we propose to do nothing. We have indicated what we can do and how it might be helpful in relation to closely held companies, as opposed to public companies. But there is a real technical difficulty and we do not see a way through that. It is right that the shareholders know who the auditors are and it is right that the shareholders should be involved in any resolution that would seek to have that aim protected.

Baroness Noakes: My Lords, I will need to discuss this with bodies such as the Institute of Chartered Accountants, because the Minister will realise that the auditors had placed much reliance on the protections that would be available to them under this clause and that now seems illusory for precisely the kind of company where it is most likely to be a problem. I had hoped that the Minister would say that he would go away and think about how the issue could be dealt with in this Bill, but I do not think that I heard that from him—unless he wishes to correct me.

Lord McKenzie of Luton: My Lords, if it will help, I am very happy to say that we do not think that we are in a happy situation, but whether we can move forward positively—I do not know; but we will certainly continue to reflect on it and if there is a way that we can get through it, obviously we will be happy to do that.

Baroness Noakes: My Lords, my amendment may offer a way forward if the Minister's officials were prepared to think constructively around that idea. I would be happy to take part in any discussions between now and Third Reading to try to reach a solution. However, I genuinely feel that this issue is an increasing problem. We have recently seen—and we have discussed this a little in yesterday's debate on Report—an increasing level of activity from some of the organisations that we have been talking about in relation to shareholders. We have already seen that in relation to auditors. This is a very important area where we need to improve protections and, as it stands, the Bill will not do that and we have to find a way through. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.

Lord Sainsbury of Turville: moved Amendments Nos. 326 to 328:
	Leave out Clause 497.
	After Clause 497, insert the following new clause—
	"NAMES TO BE STATED IN PUBLISHED COPIES OF AUDITOR'S REPORT
	(1) Every copy of the auditor's report that is published by or on behalf of the company must—
	(a) state the name of the auditor and (where the auditor is a firm) the name of the person who signed it as senior statutory auditor, or
	(b) if the conditions in section (Circumstances in which names may be omitted) (circumstances in which names may be omitted) are met, state that a resolution has been passed and notified to the Secretary of State in accordance with that section.
	(2) For the purposes of this section a company is regarded as publishing the report if it publishes, issues or circulates it or otherwise makes it available for public inspection in a manner calculated to invite members of the public generally, or any class of members of the public, to read it.
	(3) If a copy of the auditor's report is published without the statement required by this section, an offence is committed by—
	(a) the company, and
	(b) every officer of the company who is in default.
	(4) A person guilty of an offence under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale."
	After Clause 497, insert the following new clause—
	"CIRCUMSTANCES IN WHICH NAMES MAY BE OMITTED
	(1) The auditor's name and, where the auditor is a firm, the name of the person who signed the report as senior statutory auditor, may be omitted from—
	(a) published copies of the report, and
	(b) the copy of the report delivered to the registrar under Chapter 11 of Part 15 (filing of accounts and reports),
	if the following conditions are met.
	(2) The conditions are that the company—
	(a) considering on reasonable grounds that statement of the name would create or be likely to create a serious risk that the auditor or senior statutory auditor, or any other person, would be subject to violence or intimidation, has resolved that the name should not be stated, and
	(b) has given notice of the resolution to the Secretary of State, stating—
	(i) the name and registered number of the company,
	(ii) the financial year of the company to which the report relates, and
	(iii) the name of the auditor and (where the auditor is a firm) the name of the person who signed the report as senior statutory auditor."
	On Question, amendments agreed to.
	Clause 498 [Offences relating to provision of information]:

Baroness Noakes: moved Amendment No. 329:
	Page 236, line 31, leave out "knowingly or recklessly" and insert "dishonestly or fraudulently"

Baroness Noakes: In moving the amendment, I shall speak also to the other amendments in my name in this group. Clauses 498 to 500 create a remarkable new departure in our law, because they create a criminal offence for one class of professional person—auditors to companies. Our amendments fall into two groups: Amendments Nos. 333, 334 and 335 propose the deletion of this offence in its entirety; Amendments Nos. 329, 330, 331 and 332 seek to amend the offence so that it has fewer undesirable features. I shall speak first to Amendments Nos. 333 to 335.
	We established in Grand Committee that the existing law, together with the Fraud Bill, currently before the other place, will provide criminal sanctions for the vast majority of auditors who would be caught by these clauses. The Government say that the new offence is needed to catch auditors who consciously turn a blind eye or choose not to carry out work that might uncover problems. The Government say that a criminal offence should apply to such auditors, whether or not fraud or dishonesty is involved. The Government have produced no evidence that there is a problem with auditors who are not fraudulent or dishonest, but who turn a blind eye to problems. I do not believe that it is appropriate to create a criminal offence on the basis of an unproven hypothesis.
	The real fear among the auditing profession is that the new offence will not just cover the hypothetical blind eye but will criminalise negligence. It is far from clear that the wording of the new offence, which uses the concept of "recklessly", will not catch cases of misjudgement or negligence. The Minister is aware that "recklessly" carries many meanings, and it is the ambiguity that is associated with it that is the cause of great concern in the auditing profession.
	All professionals are subject to lapses of judgment, or making errors in adhering to their professional standards. Doctors and nurses occasionally kill people through such errors, but there is no special criminal offence for them. That is dealt with through their professional disciplinary procedures. The Government have never explained why auditors should be treated differently. The accountancy profession has an elaborate set of disciplinary procedures that have only recently been overhauled at the behest of the Government. These procedures carry the possibility of unlimited fines and the removal of the right to practice.
	We understand that serious concerns are being raised among those charged with disciplinary processes about the harm that the new offence will do to the effective operation of those disciplinary procedures, especially because the interests of audit firms and their partners and staff will diverge if criminal prosecutions hang over the heads of the latter.
	The offence is drafted at a petty level of detail. Under Clause 498(2) the offence applies if the auditor knowingly omits a statement on the remuneration report. An auditor who issues an audit report and financial statement that shows a true and fair view when he knows that it does not is one thing. That is the main purpose of an audit—to say whether or not the accounts show a true and fair view, as Amendment No. 332, in the name of the noble Baroness, Lady Goudie, emphasises. Omitting something about the information in the remuneration report is at such a different extreme from whether or not the accounts show a true and fair view that it seems almost laughable that a criminal offence is created, except that it is not a laughing matter for the auditors who get caught up in this.
	Even if we think that there might be at the margins the case of the occasional auditor who neglects his duties in a way that is not caught by the existing law, and there is a prima facie case for overriding the professional disciplinary rules in favour of a criminal offence, we as legislators need to consider the costs against the benefits of such a move. It is difficult to see how there are any benefits to society, given that the auditors' disciplinary procedures can remove an auditor's ability to audit, thus providing all the protection that the public need.
	The Government seem to believe that the threat of criminal prosecution will incentivise auditors to act properly. But I believe that the biggest impact will be risk-averse auditing and higher audit costs. The threat of a criminal record for cases that fall far short of dishonesty and fraud will lead the auditing profession to try to prove their audit processes against prosecution. Even if auditors believe that their existing processes would withstand disciplinary scrutiny, they will want to avoid any possibility that a criminal prosecution will be maintained, especially with the wide and uncertain formulation in Clause 498. Put simply, they will do more auditing, more documentation, more double review and more double checking. They would be fools not to do so.
	Auditors have advised us that the way in which Clause 494(2) is drawn will also drive them to more extensive testing of immaterial accounting records. What will happen to all these costs? It will lead to increased audit fees, which will mean that this Bill will impose a regulatory burden on businesses of all sizes of a very uncertain amount. In the US the Sarbanes-Oxley Act has resulted in a hike in audit fees for listed companies of between one third and three quarters. Clause 498 could do exactly the same here, which is why the CBI strongly opposes this offence.
	There are other consequences, which I am sure are all unintended by the Government. The audit firms are already reporting that their most able partners are reluctant to specialise in audits, and a cloud is starting to hang over the recruitment of trainees to the accountancy profession.
	All of this will drive the brightest and best away from the audit firms. That is not in the interests of UK plc.
	It will be plain that my preference is for this misconceived offence to be removed from the Bill. I would be delighted if the Minister were to say today that the Government have had a Damascene conversion. At a minimum, however, I hope that the Government will support Amendments Nos. 333 to 335 on the basis that they at least remove the worst effects of the new offence. These amendments replace the words "knowingly or recklessly" with "dishonestly or fraudulently", and delete the word "misleading".
	It is impossible to find a single stakeholder group outside the Government which is in favour of this new offence. However, plenty have publicly or privately voiced their concerns to the Government, as I am sure the Minister will be well aware. So far, it has all fallen on deaf ears. I hope that today will prove different.
	In its submission, the CBI stated that it is a matter of the utmost importance that the clause, as presented in the Bill, does not proceed. It said that, at the very least, it should be amended in line with the detailed amendments that I have just described; and that, without these minimum changes, if the clause is not deleted there is a real danger that the UK economy could be seriously damaged. I beg to move.

Lord Sharman: My Lords, my name is attached to this amendment. For the sake of brevity—it is a quarter to 10 at night—I will not repeat all the arguments which the noble Baroness, Lady Noakes, has put forward in support of this group of amendments. However, I support them absolutely.
	In Committee, we discussed the issue of "knowingly or recklessly". I was advised by the Law Society that this did not cover intent. If it does not cover intent, then I am deeply concerned. I therefore believe that, as a minimum, we must have something that does that.
	The noble Baroness referred to probably the best example of something similar, the Sarbanes-Oxley Act, which criminalised the responsibility for executives in signing off on reporting standards. When a chief executive and chief financial officer sign under Section 302 of the Sarbanes-Oxley Act, they do not do so, as is common in this country, for and on behalf of the board of directors. They sign in their personal capacity, and the consequences of being wrong expose them to criminal sanctions. The result has been a huge burden on individual companies to make absolutely darn sure that there is no possible risk that they could be wrong. I correct my former partner by saying that I think her estimates of the increases in audit fees as a result of the Sarbanes-Oxley Act are woefully understated. My understanding is that it is a minimum of 60 per cent, and the current increase is well over 100 per cent. You are lucky if you can get away with that.
	We must look long and hard at this offence. If the Government believe that we must criminalise this activity, then can we please ensure that intent is included, and that honest mistakes, through negligence or incompetence, are not caught? I support the amendment.

Baroness Goudie: My Lords, I have added my name to this amendment and support the noble Baroness, Lady Noakes, and the noble Lord, Lord Sharman. I hope that the Government look at this again before Third Reading, and carefully consider what all of us said on Second Reading, in Committee and tonight.

Lord Sainsbury of Turville: My Lords, Clause 498 creates a new offence for auditors who knowingly or recklessly cause an audit report to include misleading, false or deceptive matters or who knowingly and recklessly omit a statement of one of the shortcomings listed in subsection (2). I will explain in a moment why we believe that the existing wording is better than the proposed changes, but as a number of noble Lords have made clear their opposition to there being any offence at all, let me say a few words on the offence in general.
	The Government believe that the work of company auditors is of central importance to the working of the economy. Markets rely on good financial information in which they can place confidence, and reliable audit reports are an essential assurance. It is because society has such a strong interest in the work of auditors that we believe it is right that there should be criminal penalties available for auditors who give assurance about a company's accounts when they know it is not justified, or when they are reckless as to whether it is justified. This is part of the proper working of our financial markets.
	Auditors who do wrong are already subject to a range of sanctions. They include the general criminal law of theft and fraud, and, for auditors reporting on companies whose shares are traded, Section 397 of the Financial Services and Markets Act 2000 if they knowingly or recklessly make a statement covered by that Act that is misleading, false or deceptive. In addition to criminal penalties, there are the disciplinary procedures of their profession and the threat of civil liability to the company.
	These new offences apply to cases that are plainly more than negligence, but need not involve fraud or dishonesty. I hope that this addition to the range of sanctions available for errant auditors will cause a few who are tempted, for example, to sign off a report that they know to be wrong to think again and do the right thing. But I do not accept that this addition will of itself transform the behaviour of the vast majority of diligent auditors, so that they will do their jobs less well. If an auditor believes that he may be about to sign off a misleading audit report, it is good auditing that will save him from the commission of an offence, not box-ticking, as has been suggested.
	The overwhelming majority of auditors are diligent and trustworthy and need not concern themselves about these new offences. But this provision should increase the incentive for each auditor to check for any potential problems in a company's accounts, and, if there are problems, to reflect them fully in the audit report. It is worth noting here that we are looking at another aspect of this question, which is restriction on liability. I have not yet heard any noble Lord say that if one takes that pressure off it would lead to less box-ticking and a corresponding fall in the fees of auditors. There is symmetry here and trying to have it both ways is not clever.
	Let me now turn to the specific amendments.

Lord Sharman: My Lords, it is wrong to demean this issue by describing it as box-ticking. The consequence of what is proposed is not box-ticking, but a considerable expansion in the amount of detailed work that takes place. That can by no means be described as box-ticking. That is the issue. If it were box-ticking, I would be much more relaxed about it.

Lord Sainsbury of Turville: My Lords, it was not this side of House that raised the question of box-ticking; the argument that is constantly being put by the Opposition is that this will lead to box-ticking and therefore more work.

Baroness Noakes: My Lords, I did not say "box-ticking". I said that there would be more auditing, more documentation, more double-reviews and more double-checking. That is not box-ticking.

Lord Sainsbury of Turville: My Lords, I must point out that this has endlessly been the argument. People say with horror in their voices that this will lead to more box-ticking. If it leads to more auditing, that is probably not a bad thing in particular cases. The noble Baroness has constantly been arguing that it will be unproductive work, and the phrase for unproductive work is "box-ticking". That is the argument, as I have understood it. If it is now being said that that is not a problem, then I withdraw that, but I thought that that was the thrust of the argument.
	Let me now turn to the specific amendments, which would narrow the scope of the offences. Amendments Nos. 329 and 331 would change the test of the auditor's mental state from "knowingly and recklessly" to "dishonestly or fraudulently". Amendment No. 330 would change the scope from matter that is "misleading, false or deceptive" to matter that is simply "false or deceptive".
	First, let me discuss "knowingly and recklessly". The purpose of the new offence is not to deal with the auditor who can be proved to have acted dishonestly or fraudulently. As I have just said, there are already many other offences that can be used in such cases, including those in the Fraud Bill currently before your Lordships' House.
	So if we were to change it like that, it would be simply pointless because it would duplicate it.
	It has been suggested that changing to "fraudulently or dishonestly" is the only way of reassuring auditors that they will not be prosecuted for an honest mistake. That is wrong, not because prosecutors would have to prove dishonesty—they would not—but because these offences cannot be committed as a genuine mistake or through negligence. "Recklessness" is a higher hurdle for prosecutors to clear. No accountant will be at risk of prosecution unless he has made a conscious decision not to do what he knows he should do.
	I do not want to seek to define "recklessness" in other terms. "Recklessness" is what we mean, and if there were other words that expressed it better we would use them. In order to make it clearer what we intend by it, let me give you some examples of what we would expect to be covered. As we explained in Grand Committee, an example of recklessness would be an auditor who suspects that if he looked more closely at a particular area of a company's books he would discover a problem and therefore decides not to go further into that area. It will be necessary to establish that the auditor has decided to turn a blind eye for the offence to be proven. If he had merely overlooked the signs of problems through incompetence or laziness, that could be negligence, but he would not be guilty of this new offence.
	A further, more extreme example would be the auditor who simply has a drink with the company's finance director and agrees to sign a clean audit report without seeing the accounts. That is clearly reckless. I am sure noble Lords would agree that it should be punishable, but it may well not be enough to be dishonest or fraudulent. The test of "knowingly or recklessly" in these offences for auditors is in line with the corresponding offence for directors in Section 233 of the Companies Act 1985, and restated in Clause 392, which applies to any director who knew that the accounts did not comply with the Act, or who was reckless as to whether they complied. So we are not singling out auditors. Apparently that is all right for directors; we are putting auditors in the same position.
	The noble Baroness said that no other professional body is subject to this test. I do not think that that is wholly true. There is a special offence for doctors who kill people: the offence of manslaughter by gross negligence was created by the courts, not by legislation, precisely to catch grossly negligent doctors who kill their patients. Again, I think it is wrong to say that this is a unique situation. It is not in any way unique.
	I am not aware that directors live in fear of being prosecuted under the provisions I have mentioned for honest mistakes. I do not see why auditors, other than those tempted to bend the rules, should change their behaviour either as a result of the new offences.
	I hope that I have explained why we do want to use the test of "knowingly and recklessly". Changing it to "dishonestly and fraudulently", as proposed in Amendments Nos. 329 and 331, would render the offence pointless, as it would simply overlap with existing offences.
	Amendment No. 330 would narrow the scope of the offence by excluding "misleading" matter, leaving only "false or deceptive" matter. It has been suggested that "misleading" is too vague a term and that it will make auditors anxious that missing any possible ambiguity or scope for misunderstanding might leave them open to prosecution. The test is not, of course, whether there is anything in the accounts that might be misleading, it is whether the audit report is misleading. I do not see what is unclear in that, or why auditors should find it hard to avoid being misleading "in a material particular".
	There may be occasions where an auditor is tempted to draft a misleading report. If, for instance, he has no choice but to qualify his report because there are real problems with a company's accounts, he may not want to alienate the company directors and he may try to write a report that, while not false (wholly untrue) or deceptive (telling less than the whole truth), gives the impression that the qualification is merely technical. The purpose of these offences is to encourage frank reporting, so it is right that misleading matter is within their scope.
	I hope that I have explained clearly why we believe that the two phrases "knowingly and recklessly", and "misleading, false or deceptive" are the right ones to use here. If properly understood, these new offences should be of no concern to the overwhelming majority of auditors who would not consider behaving improperly.
	Amendment No. 332 was put forward by my noble friend Lady Goudie. In Grand Committee we debated whether it was appropriate for auditors to be required to check whether a company was keeping adequate accounting records. The general conclusion was that the duty was a sensible one, but that there were particular risks in applying the criminal offence to an auditor's failure to make a statement if a company's records were not adequate.
	The amendment would effectively limit the offence, so that it was applicable only if the accounting records were inadequate to enable good annual accounts to be drawn up. We have some sympathy with that view. We know that some small companies have fairly informal ways of keeping accounting records and that there are difficult judgments to be made about what would be adequate records in the context of a particular company.
	I have explained that the main justification for the offence concerns the importance of reliable financial information to shareholders and markets. That does not apply in the same way to companies' internal record keeping. I therefore agree to consider the amendment, with a view to introducing a government amendment at Third Reading.
	I think that that deals with the CBI's opposition to the new offence for auditors. I am aware of the CBI's briefing and appreciate its concern that the impact of the offence could be to increase the time, money and effort that companies must devote to internal controls over accounting records. Naturally, it looks at the impact of the Sarbanes-Oxley legislation in the United States. I note that the CBI's main concern appears to be the impact on the auditor's scrutiny of a company's accounting records.
	That adds weight to the argument made by the noble Baroness, Lady Goudie, that we should distinguish between the auditors' scrutiny of the annual accounts and their scrutiny of the adequacy of a company's internal accounting records. The scrutiny of accounts is based on well established principles, set out in various standards both national and international. The scrutiny of the adequacy of the company's internal books and records is not backed up with standards in the same way. We understand the argument that applying a criminal offence could be a blunt instrument in this area and might have unintended consequences.
	On that basis, and with the assurance that we will consider that point, I hope that noble Lords will not press their amendments.

Lord Sharman: My Lords, before the Minister sits down, perhaps he could clarify something that I thought that I heard him say for the record. I thought that I heard him say twice, "knowingly and recklessly", not "knowingly or recklessly". "Knowingly and recklessly" would go a long way to solving my concerns with the clause.

Lord Sainsbury of Turville: No, my Lords, if I did not say it, I meant, "knowingly or recklessly". It is rather difficult to know how you can have knowingly and recklessly together. It is knowingly or recklessly.

Baroness Noakes: My Lords, I thank the Minister for that comprehensive reply which, of course, we will have to study in detail. I also thank him on behalf of the noble Baroness, Lady Goudie, for the offer of reconsidering the aspect that she raised in her amendment, which is important, before Third Reading. I must tell the Minister that we remain unconvinced that letting the Bill proceed with the offence as drafted is the proper way forward. I still think that the Government have not produced any evidence that the offence is necessary. It seems to be made up on the basis of hypothetical situations that officials sitting in Victoria Street dream up about what auditors say to finance directors when they are having a drink. Frankly, it is ludicrous.
	We will consider the matter very carefully between now and Third Reading. We will obviously want to discuss the contents of the Minister's speech with those outside who have a particular concern. I am sure that we shall return to it again on Third Reading. I beg leave to withdraw the amendment.

Amendment, by leave, withdrawn.
	[Amendments Nos. 330 to 335 not moved.]

Lord Sainsbury of Turville: My Lords, I beg to move that further consideration on Report be now adjourned.

Moved accordingly and, on Question, Motion agreed to.
	House adjourned at four minutes past ten o'clock.